A Golden Cross is when the 50 day Simple Moving Average of an asset crosses over the 200 day SMA. A Death Cross is when the 50 day crosses under the 200.
Here are a few more points to add detail.
- You can learn all about the basics of golden crosses on Investopedia. So, if I don’t cover something, check there.
- Golden Crosses use the basic Moving Average called a Simple Moving Average. That is just the average price of an asset over x amount of time. For Golden Crosses it is specifically the “50 day” and “200 day” Moving Averages.
- The gist of a “Golden Cross” is that you want to see the faster moving 50 day [Simple] Moving Average cross over the 200.
- The golden cross is a bullish sign, it tells us the long term downtrend that brought the 50 day under the 200 in the first place is reversing.
- On the flip side of this, when the 50 crosses under the 200, it is called a “death cross.”
- That death crosses was an effective foreshadowing of the downtrend (it was hardly smooth sailing or all red days from there, but the trend was however clearly down overall).
- That said, SMAs aren’t the only type of moving averages. Another useful moving average for example is an EMA or Exponential Moving Average. EMAs are weighted toward the most recent price action.
- EMAs are easier to move than SMAs.
- With that last point in mind, you might not be surprised to find that we see more “golden” and “death” crosses when we look at EMAs (and this is partly why SMAs are used to foretell long term trends).
- From the vantage point of April 2019, the last four “EMA” death crosses on Bitcoin were August 2014, August 2015, March 2018, and May 2018.
- Again, from the frame of 2019, the last three “EMA” golden crosses on Bitcoin were July 2015, Oct 2015, and May 2018.
- The EMAs crosses tell a story that is important to keep in mind when thinking about crosses in general (I’m discussing EMAs here to illustrate something that isn’t clear with SMAs on Bitcoin’s chart). The story is that it is common for an initial golden cross or death cross to fail, but for it to signal the start of a new trend anyway. It wasn’t until the second attempt of the 2015 uptrend in terms of the EMAs or the second attempt of the 2018 downtrend in terms of the EMAs that we saw continuation…. and in fact, if you rewind the tape, you see this pattern play out previously as well.
- Given the last point, there are a few things to consider. For example, if we see the EMA cross first, but not the SMA, we might look for a correction before the trend starts! In 2015 when the EMA crossed the first time the price then retested the bottom before starting the face-melting uptrend of 2015 to 2017 for example.
- With that covered, one should keep in mind crosses can fail. They can fail to form, or they can form and then the trend can immediately reverse… chart trends only tell part of the story, fundamentals and other factors can impact things greatly.
- All that said, it is hard to stop these slow moving SMA crosses from forming, about the only thing that will stop it is a sharp reversal of the trend followed by continuation.
- Lastly, while there is no perfect way to play crosses in reality, in the simplest of worlds there is. Being in an asset when the 50 SMA and EMAs are above the 200s and out when they are below is a pretty darn good strategy. Then, if the 100 crosses over the 200, you know you made the right move… then you really just want to ride it out as long as the price action keeps staying above those moving averages. When you later see convergence or divergence, then you can think about selling / buying…. and that friends, is how you stay in for a bull market and stay out for a bear market in any asset as a long term investor (it is not however how you perfectly trade short term or time bottoms and tops). 😀
TIP: The golden cross is only one type of bullish cross, and the death cross is only one type of bearish cross. When any lower time frame moving average crosses a higher time frame moving average, it can be read as bullish or bearish. The implications depend on the timeframes being dealt with. Another popular pair of moving averages to consider are the 12 and 26 daily EMAs used in MACD. The 12 and 26 are great indicators of short and medium term trends.