RISK WARNING

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. See our full Risk Disclosure and Terms of Business for further details.

Search LOGIN

Golden Cross and Death Cross in Technical Analysis

 

The essence of technical analysis is to make inferences about the direction of an investment instrument or market by using statistical data.. Market experts use many methods simultaneously when analysing stock or forex markets. In doing so, they leave less room for error concerning the technical analysis signal generated by the statistical data.

The movements (volatility) on the price chart of an investment instrument occur from time to time to form various trend lines and patterns. In fact, interesting names such as, Cup Handle Formation, Shoulder Head Formation, Double Bottom or Double Top, are used to describe technical analyses. Lines, crosses or charts can be interpreted as a meaningful technical analysis signal when this pattern is repeated many times over. Therefore, the science of statistics allows us to draw logical conclusions about what price movements will follow when we see these patterns. Investors or technical analysts should add technical analysis signals to their general market assessments and news feed monitoring to make the right buy and sell decisions.

While some of the methods of technical analysis primarily draw conclusions about future price movements, some methods are used to predict (in some sense verify) how long current market conditions will last.

There are two concepts, namely Golden Cross and Death Cross that have entered almost all world languages, which are useful for drawing conclusions about the long-term price trends of the markets.

 

What is a Golden Cross?

 

The golden cross occurs when a short-term moving average (i.e. 50 days) crosses over a major long-term moving average (i.e. 200 days) to the upside. The Golden Cross is interpreted as the harbinger of a long-term bull market in which prices rise with great momentum well past previous peaks in the charts.

 

What is a Death Cross?

 

The death cross occurs when a short-term moving average (50-day) crosses over a major long-term moving average (200day) to the downside. Death cross is interpreted as a long-term bear market, where prices enter a falling trend and the lows in the charts can continue to go down.

An important parameter of the golden cross or death cross is the trading volume on the exchanges. For both charts, a high trading volume in the buy or sell direction is considered a more meaningful signal. If the trading volume is low, the analysis is considered less reliable.

Golden cross and death cross can also be interpreted as trend reversals in the financial markets. In fact, more often than not, they confirm a trend reversal that has already taken hold. If the golden cross is coming to the markets, the long-term moving average becomes the "support level" for the market. Although there might be occasional selling, a bull market is likely to stay above the 200-day moving average chart. However, if the charts indicate a death cross, the trend of the 200-day moving average will act as a "resistance” point. Despite occasional upward movements, a bear market is likely to continue with the markets remaining below the long-term moving average chart.

As we can see on the diagram, golden cross takes place in three stages;

  • In a falling trend, the first stage manifests itself in a slowing sales momentum to create a dip point.
  • The second phase will be the crossing of the 50-day moving average and the 200-day moving average, accompanied by an upward movement. Also, the short-term moving average goes above the long-term moving average. The fact that the rise in the second stage is accompanied by a high trading volume confirms the technical analysis signal.
  • The third stage is the occurrence of a long-term upward trend to higher peaks. For possible short-term declines, the moving average line acts as support and carries the trend upwards.

golden cross trend

As we can see on the diagram, death cross takes place in three stages:

  • In an ascending trend, the first step is to observe that the momentum in purchases decreases to create a peak point.
  • The second phase will be the crossing of the 50-day moving average and the 200-day moving average, accompanied by a downward movement. Also, the short-term moving average falls below the long-term moving average. The fact that the decline in the second stage is accompanied by a strong trading volume confirms the signal of technical analysis.
  • The third stage is the occurrence of a long-term downtrend that brings prices to the bottom. In case of possible short-term rises, the moving average line acts as resistance and prevents an upward trend reversal.

death cross trend

Note:

It has been observed that the economic crisis between 1929 and 1933, known as the Great Depression, the oil crisis in the 1970s, and the mortgage crisis in 2008, as well as the deep stock market declines, fit the pattern of the death cross.

Golden cross and death cross use short and long-term moving averages to generate very important technical analysis signals. However, not every golden cross can be interpreted as the beginning of an absolute bull market, and not every death cross can tell us that an absolute bear market is coming. Therefore, it would be helpful to confirm these analyses with other indicators such as RSI (Relative Strength Index), MOM (Momentum Indicator) and BB (Bollinger Bands).

 

RSI (Relative Strength Index)

 

The relative strength index (RSI) is a technical analysis indicator calculated by comparing the closing prices of a given period for a financial asset with the previous closing prices of the base period. The generally accepted RSI value is between 30 and 70. If the RSI value falls below 30, this is considered an oversold area indicating an upward movement in the trend (buy signal). If the RSI value goes above 70, this is considered an overbought area indicating a downward movement in the trend (buy signal).

 

MOM (Momentum Indicator)

 

The momentum indicator summarizes the percentage price movement of a financial instrument over a certain period. In other words, it shows the investor how much he has earned and how much he has lost during that period. If the price of a financial asset moves up from its current level while the value of the MOM indicator falls and forms a dip point, this is interpreted as a buy signal. This is considered a sell signal if the price of the instrument drops from its current level while the value of the MOM indicator is high and forms a peak.

 

BB (Bollinger Bands)

 

The technical analysis method, Bollinger bands, is named after its inventor, John Bollinger. This technique, developed in 1980 and registered in 2011 in the name of John Bollinger, consists of trend lines placed above and below the moving averages, following the standard deviation depending on the volatility of the product price. Bollinger bands create a signal whether prices are higher or lower than they should be. Bollinger bands widen when the volatility of a financial instrument's price increases; bands narrow when volatility decreases. According to the method, Bollinger bands cover about 90% of the price movement (88% - 89%). Price movements going beyond the bands are considered abnormal and interpreted as a movement in the opposite direction.

We would like to remind all our traders that no technical analysis signal could give you an absolute projection about the future of prices. Although a comprehensive technical analysis for a financial instrument provides very valuable signals, no investor should forget that losses are just as much on the cards as profits on the financial markets and so should not abandon their own risk management approaches.