What is the Death Cross? How to Use the Death Cross in Trade Coin?
What is the Death Cross?
The Death Cross (or the intersection of death) occurs on a chart when a short-term moving average crosses below its long-term moving average and crossing below a specific support level on the price chart of a financial product. Usually, the most popular moving averages used in this pattern are the 50-day and 200-day moving averages.
When Death Cross appears, a downtrend is formed. There will be stronger confirmative signals for the downtrend if the trading volume suddenly increases sharply (signs that investors are selling off).
- The Death Cross is an indicator which indicates the possibility of a significant sell-off imminent, and the bears are overwhelming the bulls.
- The Death Cross appears on the chart when an asset’s short-term moving average crosses its long-term moving average.
- The Death Cross has proven itself to be a reliable forecast when accurately predicting some of the most severe bear markets in the last century, in 1929, 1938, 1974, and 2008.
- The Death Cross can be contrasted with the Golden Cross, which indicates a strong bull movement.
What do you know from the Death Cross?
The Death Cross occurs when the short-term moving averages (usually a 50-day SMA) cross below the major long-term moving average (usually a 200-day SMA). Analysts explain that this is a definitive change signal of the bear market, signaling a period of recession.
An example of the Death Cross on the S&P 500 in December 2018:
The Death Cross originates from the X-shaped that created when the short-term MA crosses below the long-term MA line. Historically, the pattern shows the long plunging of both the long-term and short-term moving averages. It is a signal that the short-term rally momentum of an asset is slowing down (if this happens, you should prioritize the sell order), but it is not always a reliable indicator that indicates the bull market to be about to end. There have been many times when the Death Cross appeared, such as in the summer of 2016, has been proved to be a false indicator. Those who sold off their stocks in the summer 2016 missed the significant stock market gains that occurred throughout 2017.
There are different opinions about precisely determining the lines that make up this death intersection. Some analysts define it as the crossover of the 100-day moving average and the 30-day moving average; others describe it as the crossover of the 200-day average and the 50-day average. Analysts are also following this crossover on lower timeframe charts, such as the confirmation of an ongoing strong downtrend to reinforce confidence in the upcoming long-term downtrend. Regardless of which MA line or timeframe applied, the term always refers to a short-term moving average crossing over a longer-term moving average (major trend).
Example of a Death Cross
On October 25, 2019, a Death Cross happened on Bitcoin’s daily chart. It happened on May 29, 2018, causing Bitcoin to undergo a prolonged price drop for the rest of 2018 and pushed Bitcoin’s price down from $ 9,000 to $ 3035. So does the same thing happen with Bitcoin in the present time? This is a bad signal that indicating a sharp decline in the long term, but this is only an indicator, and no one can predict what the future will be like, because at each time the market situation will be different, such as the upcoming Bitcoin halving event in May 2020 is a good signal that 2018 doesn’t have.
Another example of twice the Death Cross signal occurred on Facebook Inc. (FB) shares in 2018. After the first in April, the stock turned around and started a protracted rally. However, the second happened in September, signaling a prolonged bear market for FB stock.
How to use in trade coin?
The pair MA 50 and MA 200 are commonly used by Wall Street financial investors. Analysts often think that the market will be deeply corrected if the MA50 crosses down to the MA 200 (Death Cross signal). Note that this downtrend needs the support of trading volume.
If the price decreases and the volume increases, it is a sign of an obvious downtrend. During these periods, if you are holding coins, you should cut losses and wait for the buy signal area, such as entering static resistance support levels, or use tools such as RSI, MACD, GMMA, Fibonacci… The more effective way is to combine the tools to make the signal more reliable.
For example, the RSI indicator gives a buy signal when the price has entered the oversold zone or the divergence RSI that the price chart runs to a reliable static support (a combination of struggling regions, or peaks or bottoms… together) then our buy signal will be reliable, and the probability of loss will be lower.
For day traders – day surfing traders – the death cross can be made from the shorter-term MA, for example, MA 5, MA 8 … cross below the longer-term MA like MA 21, MA 34 …
Limitations of using the Death Cross
All indicators are not fixed, it depends on the experience of each individual, and no one can predict the future accurately. All is just statistical probability. As in the example of the Facebook chart above, the first Death Cross generated a false signal. At that time, a short-term trader had some trouble during the trading. The Death Cross also frequently produces false signals, though it has been quite accurate predictions in the previous major bear markets. Therefore, when the Death Cross occurs, you should also combine with other indicators to make your trading decisions.
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