CoinFalcon Learn: Crypto Technical Analysis — Golden Cross vs Death Cross
These are indeed exciting times for the cryptocurrency industry as Bitcoin, Ethereum, XRP and many other digital assets have experienced immense growth since the start of the year 2020. In the case of Bitcoin, the number one cryptocurrency started the year a little above $7,200 and is now at $9,929 as of the time of writing — an almost $3k gain in less than two months. Unsurprisingly, other altcoins followed the rally with Ethereum posting gains of over 63%, while XRP, the third cryptocurrency by market cap has so far recorded gains of over 46% since January 1.
Binance Coin, Cardano, EOS and Stellar also put up steady gains. Tron, the 12th largest crypto asset by market cap, has also gone up over 10%. Many smaller altcoins, including KICK, LINK, HC, BTT, KMD, XVG, ZB also gained more than 8% in the last three sessions. Taken as a whole, the cryptocurrency market peaked just over $279 billion in the last seven days, the highest since August.
Image Source: CoinBureau
Now with all these surges in price, the crypto market remains severely volatile, which is why CoinFalcon has put together this quick breakdown of two rare but powerful signals on a crypto price chart technical analysis. This way, you can at least have an idea of how to navigate what many already refer to as a crypto bull year.
What is technical analysis?
Image Source: Medium
In simplest terms, technical analysis involves comprehensively studying price charts and other price-related data to make an informed trading decision. It employs statistical analysis of past price movements and the factors that influenced those movements in order to predict the probabilities of price movements in the future.
Unlike many traditional stocks, the crypto market is largely driven by greed and fear, which in turn increases the reliability of technical analysis for trading decisions. The idea is based on the premise that humans tend to act in predictable emotional patterns again and again, especially when subjected to similar price influencing factors.
Technical analysis can be quite complicated, especially in a volatile market and it’s easy to get confused with the trend lines that appear on the charts as they curve and cross in different ways that often look like shapes. You may have heard of funny names given to these shapes, such as “cup with handle,” “head and shoulders,” and “double top.” These are just terms that technical traders use to recognize certain patterns on a chart and what they might portend for the future performance of a traded asset. Among the many terms are the famous “Golden cross” and the dreaded “Death cross.”
Moving Averages
Before we get to dissecting these terms and what they mean for a particular crypto price chart, we first need to understand what is meant by Moving Averages (MA) since it is one of the most commonly used technical indicators today. A moving average is a simple way to smooth out price actions so that you can easily distinguish between actual trend reversals and typical market “noise” from random short-term price fluctuations.
This is how it would look like on a chart:
The blue line represents the moving average for that period | Chart source: BabyPips
Focusing on the slope of the moving average helps you better determine the potential direction of market prices. Moving averages are based on past prices so they lag behind current price action. The longer the time period for the moving average, the greater the lag, therefore a 200-day MA will have a much greater lag than a 50-day MA since it contains prices for the past 200 days.
Another important thing to note here is that the length of the moving average to use will typically depend on your trading objectives. If you’re looking to do short-term trading, then you’ll want to focus on the shorter moving average, such as the 20-day and 50-day MA, whereas you’ll want to focus on the longer MA, such as the 100-day and 200-day MA for long-term trading.
Golden Cross vs Death Cross
Now that you have a basic understanding of how technical analysis and moving averages work, let’s take a look at what these indicators mean. They are powerful signals that occur when there is a cross between the short-term and long-term MAs on the chart. While not 100% accurate, golden and death crosses have predicted many key market movements in the last couple of years; for example, the death cross predicted the bear markets of 1929, 1938, 1974 and 2008.
The important thing to note here is that they both underscore the potency of a primary trend, allowing traders to navigate the extremely turbulent waters of extreme intraday and day-to-day price volatility of Bitcoin, XRP, Litecoin and any other cryptocurrencies.
Golden Cross
The golden cross occurs when a short-term MA slope crosses over a long-term MA slope upwards. This is often a signal to traders that a strong bullish upward move in an asset’s price is expected.
The area highlighted in green represents the golden cross between the 50-MA and 100-MA of Bitcoin for that period | Source: Trading View
There are two main requirements to a golden cross — first, the sharp downtrend must end mostly due to seller exhaustion, meaning the downward pressure from the bears has died down. Second, the short-term MA must rise above the long-term MA. As you can see in the chart above, the price of BTC experienced a massive jump after the golden cross.
Death Cross
Conversely, the death cross is the opposite of a golden cross. It portends downward price action as a result of long-term buyer exhaustion. This dreaded event occurs when the asset’s short-term MA intersects beneath a long-term MA on a path downward.
The area highlighted in red represents the death cross between the 200-MA and 50-MA of Bitcoin for that period | Chart Source: TradingView
Based on the chart, you can see how the price of BTC nosedived after the death cross occurred. Discerning traders would have shorted their positions at the time to protect their investments from the losses that followed.
While they’re not always perfect, identifying and utilizing the golden and death crosses with other key indicators can serve as a critical compass to help you navigate the ever-volatile crypto market.
Bitcoin and Ethereum recently recorded golden crosses
If you’ve been following the price of Bitcoin and other crypto assets recently, you’ll know that BTC recently suffered some losses over the weekend, dropping from the $10,500 level to the $9,400 support levels. Other cryptocurrencies also suffered short-term losses, but for now it would seem the crypto market is seeing the signs of a recovery. Crypto enthusiasts will be pleased to know that a golden cross has formed in the price charts of Bitcoin, Ethereum and some other cryptocurrencies.
The 50 and 200-day moving average of Bitcoin experienced a cross over — the golden cross |Source: TradingView
The last time we saw a golden cross in the bitcoin chart was on April 23, 2019, which preceded the bull rally from its $5,300 level to its year high of over $13,000 in June.
Ethereum’s 50 and 200-day moving average intersect — the golden cross | Source: TradingView
Ethereum’s golden cross occurred over the weekend, as the number two cryptocurrency by market cap saw its first major retracement after a strong bullish surge in its price since the start of the year. As of the time of writing, ETH is testing the $290 price level.
IMPORTANT REMINDER
Technical analysis, moving averages and golden/death crosses are not an exact science. There is no system, pattern or indicator that works 100% of the time, especially in the relatively new crypto market. Therefore, you should note that this article is only for educational purposes and should not be construed as any form of investment advice whatsoever.
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