In this article we will discuss the “Golden Cross” and the “Death Cross”. These colorful terms refer to the chart patterns that most traders use in their trading every day, but may not mean these names. Along with many of their analogues, they include a whole section of technical analysis. Most often, these graphical patterns are referred to as intersections. Moving averages…
Moving averages are vital market data, but they all have one common limitation – they lag behind current events. By the time 20 is period Moving average bends up, confirming the trend, the movement is already in full swing and may even be over. Although faster options (like exponential Moving averages) speed up the giving of signals, anyway, all of them give trading signals too late.
Using multiple Moving averages allows you to overcome many of the disadvantages of a single instance. They are especially effective when used in conjunction with charting price patterns. For example, take long-term and short-term Moving average… Then watch the price movement when Moving averages turn to each other and cross. In this case, a good trading signal can be received, especially when it coincides with a key support or resistance level.
Moving averages exhibit all the usual characteristics of support and resistance. For example, one Moving average will often bounce off the other on first test rather than burst out right away. Then, like price bars, the odds shift towards the violation and crossover Moving averages at the next test. On the contrary, when alone Moving average can’t break through another Moving average after several attempts, it gives a strong signal about the possibility of a trend reversal.
Different trading periods require different periods for Moving averages… Swing trading, one to three days in duration, works well using Moving averages, the ratio between the periods of which corresponds to a 3- or 4-fold difference. This allows convergence / divergence between different trends to work in the best interest of the trader.
For example, a daily chart might show a strong uptrend, while a 60 minute chart starts a deep retracement. 40-day Moving average will continue to point in the direction of the trend for a long time, but the 13-day Moving average (3×13 = 39) will quickly turn down and indicate the direction of possible movement for a longer Moving average… The point where they intersect represents the major support level
Crossovers mark important changes in momentum and support / resistance levels regardless of time frame. Many traders, accordingly, can only stick to Moving averages and know most of what they need to know. The most popular parameters for Moving averages are: 20-day for short-term trends, 50-day for medium-term and 200-day for the big picture.
Long-term crossovers carry more weight than short-term events. The Golden Cross represents a major change from a bearish to a bull market. This happens when the 50-day Moving average breaks above 200-day Moving average… On the contrary, the “Death Cross” restores the power of the bears when the 50-day Moving average falls back below the 200-day. 200-day Moving average becomes major resistance after the 50-day Moving average falls below it, and main support after 50-day breakout Moving average above her. When price is “trapped” between 50 days and 200 days Moving averages, it can fluctuate repeatedly in the price range limited by these extremes. These swings represent an excellent opporunity for short-term swing trading (swing trading).
Using intersection Moving averages reatly enhances many types of trading strategies. But try to limit yourself to using them in trending markets. Because Moving averages give false signals in sideways markets. Keep in mind that these are common indicators for measuring directional momentum. They lose their effectiveness in markets with little or no price change.
For many years, technical analysts have been trying to create filter systems for crossing Moving averages through trend recognition formulas to reduce false signals and rapid reversals. You can also try to do this, or you can focus on chart price patterns that will tell you if the intersection is Moving averages standing or not.
Markets that are constantly in sideways ranges limit the usefulness of any information provided Moving averages… All Moving averages in dead markets, they converge, ultimately, to the same price level. This behavior Moving averages, when they converge in one line, gives a clue to further tactics of action. Stop using completely Moving averageswhen such a situation occurs and switch to oscillators (for example, Stochastic) to predict further price movement.