A moving average in technical analysis is used as a tool that smooths out price data by constantly creating updated average prices.
In general, common moving average (MA) lengths are 8, 9, 10, 13, 20, 21, 34, 50, 55, 100 and 200.
Traders prefer to use two short-term and one long-term moving averages in their charts. You can even use one short-term and one long-term based on your choice. These lengths can be applied to different time frames to know how average prices are moving in a price chart.
Now, let us know what is moving average crossover, and when death and golden cross happens in a price chart.
What is moving average crossovers
Moving average crossover is one of the main strategies that traders use to trade.
A moving average crossover takes place when a short-term moving average, which has been trading above (or below) a long-term moving average, penetrates and crosses below (or above) the long-term line.
For example, the 50-day moving average falls below the 200-day moving average or the 50-day moving average rises through the 200-day moving average.
These types of crossovers signal continuation of the price move in the same direction of the short-term moving average.
Golden Cross
When a short-term moving average crosses above the longer term moving average, it’s known as the golden cross. This means, the trend is sifting up.
For the golden cross, the two best moving averages used are 50-period (short term) and 200-period (long term).
This means when 50 period MA crosses above the 200 period MA, it’s known as the golden cross.
Golden cross indicates a bottom to a downtrend and a breakout or confirmation of trend reversal.
After the golden cross, the long term MA is considered as a major support line.
Death Cross
When a short-term moving average crosses below the longer term moving average, it’s known as a death cross. This means, the trend is sifting down.
In other words, the death cross occurs when the 50-period MA (short term) crosses below the 200-period MA to the downside.
After the death cross, the long term MA is considered as a major resistance line.
A death cross and a golden cross are exactly opposite.
Crossover is considered as more significant if it is accompanied by high volume.
Intraday traders may use some other moving average for Golden and death cross strategy.
Are golden and death crosses reliable indicators?
Moving average works best when a stock is moving in an uptrend or downtrend. In a sideways market, moving average moves in a horizontal line giving you no signals.
Moving averages are considered as lagging indicators, since they are calculated from price action that has already taken place, they lag the current price.
Beginners or novice traders always look for the “holy grail”, that can broadcast instantly and with conviction, the perfect signal as to where the stock, or index will travel next. But, unfortunately, there is no holy grail.
No indicator can tell you for sure where price will move next and for how long.
Remember, no indicators are 100% reliable. All indicators are lagging, it can not predict the future all the time. However, most of the time it will indicate to you about turning points in price action. Technical analysts often use golden and death cross as confirmation of a trend or signal in combination with other indicators.
Moving average crossover can be used along with various momentum indicators such as stochastic, moving average convergence divergence (MACD), and relative strength index (RSI) to track when the overbought and oversold area.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
