{"id":1021662,"date":"2022-07-25T03:04:01","date_gmt":"2022-07-25T10:04:01","guid":{"rendered":"https:\/\/www.tradingheroes.com\/?p=1021662"},"modified":"2024-03-22T11:31:52","modified_gmt":"2024-03-22T18:31:52","slug":"difference-between-golden-cross-and-death-cross","status":"publish","type":"post","link":"https:\/\/www.tradingheroes.com\/difference-between-golden-cross-and-death-cross\/","title":{"rendered":"Golden Cross vs Death Cross Differences Explained"},"content":{"rendered":"

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When you buy something through one of the links on our site, we may earn an affiliate commission.<\/div><\/p>\n

Two of the best known technical trading setups are the “crosses,” or the Golden Cross<\/strong> and the Death Cross<\/strong>.<\/p>\n

They are used to signal the potential start and end of long-term uptrends and downtrends. This technical analysis method is usually used on the daily chart.<\/p>\n

A Golden Cross and a Death Cross are opposite signals and occur when the shorter term moving average crosses over the longer term moving average.<\/strong><\/p>\n

The most commonly used moving averages are the 50-period Simple Moving Average<\/strong> (50 SMA) and the 200-period Simple Moving Average<\/strong> (200 SMA).<\/p>\n

Keep reading and you'll learn the specifics of each crossover and see examples of each cross in different markets.<\/p>\n

You'll learn how to get Golden Cross and Death Cross alerts<\/strong> on your computer or smartphone.<\/p>\n

Most importantly, you'll also learn how to backtest these crosses<\/strong> to see if they actually work in the markets you trade (no coding needed).<\/p>\n

Golden Cross Explained<\/h2>\n

A Golden Cross occurs when the 50 SMA crosses above<\/em> the 200 SMA.\u00a0<\/strong><\/p>\n

This suggests that the market is entering a long-term uptrend.<\/p>\n

Examples of Golden Crosses<\/h2>\n

Here's an example of a Golden Cross in Bitcoin.<\/p>\n

After the cross, the market went on a big run.<\/p>\n

\"Golden<\/p>\n

This is another example on the AT&T chart.<\/p>\n

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It's very easy to spot a Golden Cross, once you know what to look for.<\/p>\n

Death Cross Explained<\/h2>\n

Conversely, a Death Cross occurs when the 50 SMA crosses below<\/em> the 200 SMA.\u00a0<\/strong><\/p>\n

This is a clue that the market could be entering a long-term downtrend.<\/p>\n

Examples of Death Crosses<\/h2>\n

Here's a Death Cross in the Nasdaq, which signaled the beginning of a bear market.<\/p>\n

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Another chart showing a bearish cross on a AUDUSD chart.<\/p>\n

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Now that you know what these crosses look like, the next question is…<\/p>\n

Do These Moving Average Crosses Really Work?<\/h2>\n

Most of the research around moving average crossovers has been done in the stock market.<\/p>\n

This is a study that I found particularly interesting because they tracked both Golden Crosses and Death Crosses across multiple US stock sectors.<\/p>\n

As you can see, trading these crosses worked out well during the bull market between 2009 and 2018.<\/p>\n

They also did a longer-term study over 20 years, and the results were also profitable.<\/strong><\/p>\n

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Source: FactSet<\/a><\/figcaption><\/figure>\n

However, there's a twist to this study…<\/em><\/p>\n

Instead of selling short on a Death Cross, they actually went long.\u00a0<\/strong><\/p>\n

They found that this method generally outperformed the Golden Crosses in a bull market because they were entering the uptrend on a pullback.<\/p>\n

So although a moving average crossover is a super simple concept, there are many variations that you can experiment with.<\/p>\n

Some of them might work better than the basic strategy.<\/p>\n

When These Crosses Don't Work<\/h2>\n

Just like with everything else in trading, a Golden Cross or a Death Cross does not a guarantee a profitable trade.<\/p>\n

There will be periods where the market goes into consolidation phases and that's when you can lose money.<\/p>\n

\"Russell<\/p>\n

Here's an example of this in the Russell 2000.<\/p>\n

If you took every trade on this chart, you would end up with a net loss.<\/p>\n

So be aware of the market you're trading and if price action starts to get choppy, it's best to pause and re-evaluate.<\/p>\n

Optimize Your Entries<\/h2>\n

There are several ways that you can optimize your entries and make your trades more profitable.<\/p>\n

Here are 2 ideas that you can experiment with…<\/p>\n

Trade a Pullback<\/h3>\n

Instead of buying or selling exactly when the crossover happens, you can look for an area of support or resistance after the cross to enter a trade.<\/strong><\/p>\n

For example, instead of going long exactly at the Golden Cross on this gold chart, you could wait for the support level to form at the orange line.<\/p>\n

Then you could buy below the orange line to get a better price than if you entered at the crossover.<\/p>\n

As long as price stays above the 200 SMA, your trade has a good chance of working out. A good place to put your stop loss<\/a> is at, or slightly below, the 200 SMA.<\/p>\n

This entry method will also give you the opportunity to get in late, if you missed the original signal.<\/p>\n

\"Buy<\/p>\n

It would be the same idea in a downtrend, except you would be looking for resistance after a Death Cross.<\/p>\n

Ride the 50 SMA<\/h3>\n

Here's a classic trend following method…<\/p>\n

After a cross, you could also trade a retracement to the 50 SMA.<\/p>\n

This entry will cause you to lose out on some profits, but it will also help ensure that you're in a strong trend.<\/p>\n

For example, here are a few long entries that would have worked in the S&P500.<\/p>\n

\"Ride<\/p>\n

First make sure that the 50 SMA is above the 200 SMA.<\/p>\n

Next, wait for price to drop below the 50 SMA, then close back above it to enter a long.<\/p>\n

Then trail your stop loss is a way that you feel comfortable with. A great place to start would be a close below the 50 SMA.<\/p>\n

Again, it would just be the opposite in the case of a downtrend after a Death Cross.<\/strong><\/p>\n

In order to find out if these ideas will work in the market you trade, you'll have to backtest.<\/p>\n

Here's how to do that…<\/p>\n

How to Backtest Golden and Death Crosses<\/h2>\n

Let's get real, most trading strategies don't work in all markets.<\/p>\n

So you'll have to do some testing to figure out which markets work with these moving average crossovers.\u00a0\u00a0<\/strong><\/p>\n

Since these moving averages are so easy to setup, you can quickly backtest them in any market<\/a> and on any timeframe.<\/p>\n

Backtesting is essential because you want to know that the strategy has worked over a long period of time, which will give you confidence to take trades.\u00a0<\/em><\/p>\n

If you're new to backtesting, then read my backtesting guide for beginners<\/a> to get started.<\/p>\n

NakedMarkets<\/a> is a great software for backtesting strategies, especially if you don't know how to code.<\/p>\n

The first thing you should test is the basic version of the strategy.\u00a0<\/strong><\/p>\n

For a long, do the following:<\/p>\n