Chart patterns are abundant when it comes to technical analysis. We have already talked about them in A Beginner’s Guide to Classical Chart Patterns, and 12 Popular Candlestick Patterns in Technical Analysis. However, there are many other patterns out there that can be useful for day traders, swing traders, and long-term investors. These are the golden cross and the death cross.
Before we get into what a golden cross and a death cross is, we need to understand what a moving average (MA) is. In short, it’s a line plotted over a price chart that measures the asset’s average price for a given time frame. For example, a 200-day moving average will measure the average price of the asset in the last 200 days.
So, what is a golden cross and a death cross, and how can traders use them in their trading strategy?
What is a golden cross?
A golden cross (or golden crossover) is a chart pattern that involves a short-term moving average crossing above a long-term moving average. Typically, the 50-day MA is used as the short-term average, and the 200-day MA is used as the long-term average. However, this isn’t the only way to think about a golden crossover. It can happen on any time frame, and the basic idea is that a short-term average crosses over a long-term average.
Typically, a golden cross happens in three phases:
- The short-term MA is below the long-term MA during a downtrend.
- The trend reverses, and the short-term MA crosses above the long-term MA.
- An uptrend starts where the short-term MA stays above the long-term MA.
What is a death cross?
A death cross is basically the opposite of a golden cross. It’s a chart pattern where a short-term MA crosses below a long-term MA. For example, the 50-day MA crosses below the 200-day MA. As such, a death cross is typically considered to be a bearish signal.
Typically, a death cross happens in three phases:
- The short-term MA is above the long-term MA during an uptrend.
- The trend reverses, and the short-term MA crosses below the long-term MA.
- A downtrend starts when the short-term MA stays below the long-term MA...