The death cross is a technical pattern that signifies the transition from a bull market to a bear market. The Death Cross occurs when a short-term moving average (50-day) crosses below a long-term moving average (200-day).
The death cross name comes from the X-shape created when the short-term moving average goes below the long-term moving average.
The Death Cross proved to be a reliable predictor of the most severe bearish markets of the past century, including 1929, 1938, 1974, and 2008.
What is the Death Cross?
The Death Cross forms on a chart when an asset’s short-term moving average, usually the 50-day, crosses below its long-term moving average, usually the 200-day.
Historically, the pattern emerges after a downturn for long-term and short-term moving averages. The Death Cross identifies that short-term momentum is slowing down.
Some traders define the Death Cross as a crossover of the 100-day moving average and the 30-day moving average, while others describe it as the crossover of the 200-day average and the 50-day average. Traders also watch for the crossover occurring on lower period charts as confirmation of a robust and ongoing trend.
The inverse of the Death Cross is the Golden Cross. It surfaces when the short-term moving average moves above the long-term moving average.
How to use the Death Cross?
The Death Cross pattern is more useful for traders when it is used in combination with other forms of technical analysis and fundamental analysis. One of the most popular technical indicators to prove a long-term trend change is a trading volume. Higher trading volume indicates more investors are buying or selling and is the cause of a significant trend change. The Death Cross is sometimes considered a more reliable signal if it occurs along with high trading volumes.
The momentum oscillators, such as the MACD, can also be used for trend confirmation. They performed fine because the momentum of a long-term trend often fades away before the market makes its turn.
Day traders commonly use smaller periods like the 5-period and 15-period moving averages to trade intra-day Death Cross breakouts. The time interval of the charts can be adjusted from 1 minute to weeks or months. The larger the chart time-frame, the stronger and lasting the Death Cross signals are.
Some traders do not rely too much on the Death Cross pattern, because it is often a very lagging indicator. The downward moving average crossover may not appear until after the point at which the trend has shifted from the bullish to bearish. An asset’s price may already have fallen a substantial amount before the crossing death signal. A clear example of this was the 2016 summer when it provided false signals.
Death Cross trading strategy
The Death Cross provides entry and exit points and can be considered a strong bearish pattern. To make it more effective, the Death Cross can be applied with other technical indicators.
As the pattern is bearish, it only gives sell signals. However, traders can leave their long positions after the appearance of the Death Cross.
Death Cross sell strategy
- The short-term moving average should break below the long-term moving average.
- Wait for the price bar to go bearish before entering.
- Enter after pinpointing the Death Cross.
- Set a stop-loss near the recent high from the entry point.
- Exit the trade when the trend changes.
Death Cross conclusion
The Death cross was able to predict many of the past market crashes. This shows that the pattern has the potential to forecast trend changes. However, no indicator is 100% accurate, and the Death Cross I would combine with multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all forex trading signals whatever forex strategy I was using.
Becoming a successful forex trader can take many years of practice. It is not easy to make a living from forex trading in my opinion. It will require immense trading discipline, good money management, and a bullet proof trading plan.
The methods of trading forex that are outlined within this article are just ideas. You should trade forex in a way that suits your own individual style, needs and goals.
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