Golden Cross vs. Death Cross: What Are They and How Are They Different?
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Summary:
The golden cross and death cross are technical indicators used by traders and investors to predict market movements. A golden cross occurs when a short-term moving average crosses above a long-term moving average, indicating a potential bullish trend. On the other hand, the death cross occurs when a short-term moving average crosses below a long-term moving average, indicating a potential bearish trend.
If you’re a beginner at investing, you have probably come across all kinds of confusing terms. Two terms you are bound to hear of eventually are the “golden cross” and “death cross.” But what do these ominous terms mean? And how can you use them to make the most from your investments? In this article, we’ll take a closer look at both golden and death crosses, what they mean, as well as when and how to use them effectively.
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What is a golden cross?
A golden cross is a technical indicator that occurs when a short-term moving average (such as the 50-day moving average) crosses above a long-term moving average (such as the 200-day moving average). This signal indicates a potential bullish trend and is often used as a signal to buy or hold.
You can recognize a golden cross by looking for three signals:
- A downward trend that ends as the selling pressure subsides.
- A transition phase marked by the crossing of the shorter moving average above the longer moving average.
- An upward trend that potentially leads to increased prices.
You can see this pattern occur in the below chart tracking the differences between the British pound and the Australian dollar.
What does this mean for the investor?
Since a golden cross signals a general upturn in the market, you may be tempted to sell all of your stocks immediately. However, this could ultimately be a bad idea.
A golden cross is often a sign that the market could be bullish. This means that, although the current market is going up, there could be a sudden drop in a particular market or stock. Because of this, it’s best to use your knowledge of a golden cross alongside your other investment insights.
If you’re not sure what to look for in the stock market or want to start investing yourself, first speak to a brokerage about opening an account.
What is a death cross?
A death cross is the exact opposite of a golden cross. This occurs when a short-term moving average (such as the 50-day moving average) crosses below a long-term moving average (such as the 200-day moving average). This signal indicates a potential bearish trend and is often used as a signal to sell or short.
Similar to a golden cross, keep an eye out for a death cross using these signals:
- An upward trend that ends as the buying pressure subsides.
- A transition phase marked by the crossing of the longer moving average above the shorter moving average.
- A downward trend that potentially leads to decreased prices.
Just as with the golden cross, this pattern can be difficult to image without a real-life example. Below you can see a death cross form in late 2018 when the S&P index plunged 11% in just two weeks.
What does this mean for the investor?
Just as a golden cross signals a bullish trend, a death cross may mean the exact opposite: a bearish trend. In a bear market, stocks that were previously sky-high may take a significant dive.
Because of this possible decline, a death cross may indicate that you should sell or short your relevant stocks.
FAQs
How reliable are these indicators?
The reliability of these indicators can vary depending on market conditions. They can generate false signals in a choppy market and may not be as effective in certain market conditions.
Are there any other indicators that can be used in conjunction with the golden cross and death cross?
Yes, many traders and investors use these indicators in conjunction with other indicators such as the relative strength index (RSI) and moving average convergence divergence (MACD) for added confirmation.
How do the golden cross and death cross work in different market conditions?
A golden cross and death cross can work well in trending markets, but may not be as effective in choppy or sideways markets.
Key Takeaways
- The golden cross and death cross are technical indicators used to predict market movements.
- A golden cross occurs when a short-term moving average crosses above a long-term moving average, indicating a potential bullish trend.
- On the other hand, a death cross occurs when a short-term moving average crosses below a long-term moving average, indicating a potential bearish trend.
- Both indicators have their strengths and weaknesses and should be used in conjunction with other indicators and market analysis.
- It’s important to remember that these indicators should be used as one of many tools in a trader’s toolbox, and should not be relied upon exclusively.
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