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Exploring the Golden MA Cross and Death Cross - 50, 100, 200
Traders may spot various signals by using EMA and SMA indicators. One of the most meaningful is the Golden Cross or Death Cross. Moving Averages are a type of charting tool in the form of lines plotted in a price chart whose purpose is to smooth out the fluctuations in the price action of a financial instrument, in this case, a crypto instrument.
By using a combination of two moving averages, both based on long periods, technical analysts try to seize trend reversal opportunities following such a cross. In this article, we will overview EMA, and SMA, and explore golden and death crosses.
SMA and EMA: Overview
Simple Moving Average (SMA) performance is widely used in technical analysis to reveal the underlying direction of the price. This technical tool calculates a simple formula to average the price action of the assets over a specific period.
The formula sums all the closing prices from the periods and divides them by the number of periods of the moving average. For example, in the BTC chart:
- A 10-period SMA will sum the closing prices for the last 10 days (60000, 59000, 58500, 60400, etc...).
- Then, divide the sum by the number of periods of the MA (for example, 611 / 10 = 61.1, this is the average closing price of BTC over the last 10 days).
On the other hand, the Exponential Moving Average (EMA) performs a variation in the formula, making it more responsive to price fluctuations and allowing the EMA to average faster.
This moving average adds the recent closing price to the calculation and uses a multiplier factor. These two formula variants yield exponential results, causing the EMA to point to more recent fluctuations.
By using the example from the SMA calculation, the formula for EMA will be as follows:
- EMA(today) = (Price(today) * multiplier) + (EMA(yesterday) * (1 - multiplier))
- EMA(today) = ( 61.1 * 2/(10+1) ) + ( 60 * (1 - 2/(10+1) )
- Day 1 = 61.1
- EMA = ( 61.1 * 0.1818 ) + ( 60 * 0.8181 )
- EMA = 60.786 for Day 1
- Day 2 = 62
- EMA(day 2) = ( 62 * 0.1818 ) + ( 60.786 * 0.8181 )
- EMA = 60.99 for Day 2
As we see, using the average closing price of the SMA over the last 10 days (61.1), the EMA formula calculates more approximate prices for the subsequent days.
Understanding these differences can be vital to interpreting the Golden Cross and Death Cross from distinct data points.
Why 50, 100, 200? Longer Periods Vs. Shorter Periods
One of the most implemented combinations, whether for SMA or EMA, is the trio of 50, 100, and 200 periods. These three periods often represent a more reliable source of signals since they calculate longer periods.
The discussion about effectiveness on longer and shorter periods is ultimately a matter of the trader's ability to read price movements. It may depend on the trading style, specific strategy, and time frames.
However, longer periods have been shown to be highly effective at different market stages, especially in combination. Such is the case for 50, 100, and 200 periods.
Typically, to spot Golden Cross and Death Cross signals, traders will only use two of these three periods. Two typical combinations are:
- 50 and 100 periods EMA/SMA.
- 50 and 200 periods EMA/SMA.
However, other variations can be 100 and 200 periods.
Golden Cross
The Golden Cross is a technical signal traders interpret as a bullish suggestion in their market analysis.
When a shorter period EMA or SMA (50) crosses above a longer one (100), traders aim to seize a bullish trade opportunity.
Death Cross
The Death Cross, the opposite of the Golden Cross, is a bearish signal traders interpret as a downtrend suggestion likely to take action in the markets.
When a shorter period EMA or SMA (50) crosses below a longer one (100), traders look to seize a bearish trade entry.
Death cross with selloff (big red candle and potential key level)
Not All Golden Cross or Death Cross will be followed by big candles but still large movements.
Trading Golden And Death Crosses
Typically, at the end of a prolonged trend, the chances of a significant reversal increase as the price is likely to find a strong supply or demand zone, depending on the market direction.
Situations such as the following may arise:
- If the price is trending up, a key resistance level could influence supply, pushing the price down sharply.
- If the price is trending down, a key support level could affect demand, moving the price up sharply.
It is important to note the significance of the golden and death crosses.
Since they work with longer moving average periods, more closing prices are needed to perform the calculation, and the average prices that the moving average points to are often crucial areas for selling or buying pressure.
Such confluence tends to be effective most of the time, and it is the key to understanding the importance of these technical signals.
Golden and death crosses can be traded from multiple time frames and trading styles. For example:
- Higher time frames: A golden or death cross in higher time frames, such as the 4-hour, suggests high trading pressure. Typically, it occurs following a large candle. It can be a signal for swing traders to seize an upcoming significant trend.
- Lower time frames: Golden and death crosses can help traders spot the trend for the day in lower time frames such as the 15-minute to 5-minute. Similar to higher time frames, these crosses will appear following a sharp movement, for example, at the session opening.
- Daily time frames: In daily time frames, these MA crosses suggest a meaningful trend reversal. Investors could spot potential entries for long-term positions following the appearance of this technical signal.
The importance of key levels for accurate cross.
The golden and death cross seen from a higher time frame (12h) demonstrates the relevancy of key levels.
Conclusion
Golden Cross and Death Cross are two powerful signals traders can spot by using EMA or SMA indicators. These crosses represent worthy trend reversals in the market as the moving averages calculate long periods, often pointing to heightened supply or demand price zones.
We addressed the differences between simple and exponential moving averages calculation as a noteworthy point to understand the distinctions between EMA and SMA crosses. Traders may see EMA vs. SMA in action on paper trading before taking them to real trading.
In Altrady, traders can use simple and exponential moving averages alongside a wide range of tools to start trading Golden Cross and Death Cross signals. Sign up for a free trial account