How to use the golden cross and death cross indicators in trading
Death Cross and Golden Cross: Intro
The Death Cross and Golden Cross indicators are two relatively easy patterns to learn for traders learning technical analysis. Both indicators use two moving averages (MAs) to signal when price action turns bullish or bearish.
A moving average is a line plotted on a price chart that tracks the average price of an asset over a period of time. For example, a 50-day moving average measures the average price over the last 50 days, updated each day as a moving average. A short-term moving average exhibits choppy price action, while long-term moving averages, such as a 200-day ma, are plotted as smoother, less volatile lines.
When searching for gold crosses and death crosses, a 50-day moving average and a 200-day moving average are usually used. However, you can customize these MAs to best suit your trading strategy.
Read on to learn more about the two indicators, how to spot them, and examples of the golden cross and death cross.
What is a death cross in trading?
A death cross is a chart pattern that occurs when a short-term moving average crosses below a longer-term moving average. The Death Cross signal is classified as a bearish signal that represents the start of a downtrend in price action.
The death cross indicates price action has fallen during the life of your shorter moving average – about two months using a 50-day MA. The shorter average, which represents more recent price action, has fallen below the longer MA, which represents historical price action.
It can be helpful to visualize this change in shorter time frames: if an asset’s value yesterday and today was higher than its average price over the last week, it must appreciate in value. If an asset’s value today is lower than its average price over the past week, it must be depreciating.
How to recognize a death cross
You can spot a death cross by noticing when the longer-term moving average crosses the shorter-term moving average. The Death Cross occurs in three phases:
- Continued Uptrend: The market price is in an uptrend where a 50-day moving average is above a 200-day moving average
- Crossover: Price reverses and the 200-day moving average crosses over the 50-day moving average, starting a downtrend and creating a death cross on the price chart
- Bearish Downtrend: The price continues its downtrend and the 200-day moving average remains above the 50-day moving average, confirming the downtrend
The death cross can represent a false signal where the price action will find a bottom shortly after and recover from its uptrend.
Example of a death cross trading pattern
In the AUD/USD chart above, you can see that the 200 hourly MA (red line) crosses above the 50 hourly MA (green line) while a sharp fall in USD versus AUD occurs immediately afterwards.
What is a gold cross in commerce?
A golden cross is a chart pattern that occurs when a long-term moving average crosses below a shorter-term moving average. The golden cross is considered a bullish signal that represents the start of an uptrend.
A gold cross indicates when price action enters a bull run and is the opposite of the death cross indicator.
How to recognize a golden cross
You can spot a golden cross by noticing when a short-term moving average crosses a longer-term moving average. The Golden Cross occurs in three phases:
- Continued Downtrend: Price action starts in a downtrend with the 50-day moving average below the 200-day moving average
- Crossover: The 50-day moving average crosses over the 200-day moving average, signaling a reversal of the price action into an uptrend and forming the golden cross on the price chart
- Bullish Uptrend: The uptrend continues and the 50-day moving average remains above the 200-day moving average, confirming the golden cross
Traders should wait to see if the trend will continue or if the moving averages will reverse to avoid potential fake outs before entering into a position. You may be tempted to enter a long trade as soon as you see a golden cross, but you should confirm this signal with other indicators before trading.
Example of a gold cross trading pattern
On this chart, the 50 hour MA (red line) crosses the 200 hour MA (green line). The price of the USD versus the AUD was already strengthening, but right at the time of the crossover, it was showing a notable multi-day uptrend.
How reliable is a death cross or a gold cross?
The Golden Cross and Death Cross indicators have proven useful for many markets including stocks, forex, and cryptocurrencies. However, each market has its own fundamental influences and different levels of volatility.
As with most trading patterns, indicators are more reliable on higher timeframes. This means that a crossover of the 1 hourly and 5 hourly moving averages is a weaker indication of price action than a crossover of the 50 hourly and 200 hourly moving averages.
It is important to remember that moving averages are lagging indicators, meaning they only show what has already happened in the market. When a death cross or a gold cross appears on a price chart, the market has already moved in that direction. Lagging indicators like the Death Cross and the Golden Cross are best used to confirm other leading indicators like the Relative Strength Index (RSI) or the Stochastic Oscillator.
How to use Death Cross and Gold Cross Indicators
Ready to use these crosses in your own technical analysis? Follow these 4 steps to start trading the golden crosses and the death crosses.
- Open your FOREX.com account. It’s free and usually takes less than five minutes. Already client? Sign up here
- Add some money so you can start trading right away
- Select the FX pairs you want to trade. Popular markets are EUR/USD, GBP/USD and USD/JPY
- Find opportunities with our suite of trading tools, including indicators like the Golden Cross and Death Cross, advanced charts and SMART signals
- Open your first position
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