The Search For Bitcoin’s Death Cross
Can A Death Cross Predict A Bitcoin Bear Market?
Why Are Death Crosses Supposed To Matter?
There’s been a lot of talk lately about bitcoin and price chart patterns commonly known in technical analysis as “death crosses.”
The conversation revolves around how a death cross pattern in bitcoin’s price chart would accurately presage the beginning of a downtrend.
At the risk of sounding flippant, I’m going to puff up my 25 years of experience trading the financial markets and say, “no, it doesn’t presage anything.”
I shall now try my best to explain my bias in the rest of the article.
Let’s get straight to the point and take a look at bitcoin’s daily chart.
A moving average (MA) line plots a commodity’s average price, whatever the time frame.
For instance, the red line 50-bar MA on the daily chart above tracks bitcoin’s 50-day average daily close in U.S. dollars.
Similarly the blue line 200-bar MA on the above daily chart plots bitcoin’s 200-day average daily close in U.S. dollars.
Many are fixated on what happens when that red line crosses the blue line from above.
Why Moving Average Crossovers Shouldn’t Matter
The textbook definition of a “death cross” is that it occurs when a short-term MA crosses below a long-term MA after a period where the short-term MA had been above the long-term MA in an established uptrend. A new downtrend then is said to be “confirmed” if the short-term MA continues to stay below the long-term MA.
It’s a mouthful, I know.
Bitcoin had been trending upwards before slowing down beyond $45,000 from February 2021. This caused the more responsive 50-day MA to begin turning first and eventually curving down toward the less-responsive 200-day MA.
Some chartists believe moving average lines are also capable of generating trading “signals” when lines of different average sizes cross into each other, i.e. when MA crossovers occur.
If the 50-MA crosses below the 200-MA, it will confirm the new downtrend for bitcoin, and this confirmation is important to some people, particularly those in mainstream financial news media like WSJ, Bloomberg, and Reuters, who frequently use the 50–200 MA crossover combo to define trend changes in financial market instruments.
It is the usefulness of the aforementioned crossovers that is the topic of this article.
Throughout my entire career as a trader, no one has ever been able to convince me why MA crossovers matter after I explain to them that MAs are “lagging indicators” and that MA crossovers are merely lagging indicators of lagging indicators.
So what’s a lagging indicator? In technical analysis, a lagging indicator — like the simple moving average — is a financial signal or phenomenon that occurs only after shifts in the underlying price had already happened.
This means lagging indicators serve only to confirm a trend that is already underway. They do not predict trends.
I showed the above chart to my 20-year-old nephew (who is attending engineering school in Scotland) and explained to him about moving averages and the “importance” of the death cross while trying real hard to hide my disdain for MA crossovers.
Being the uncorrupted innocent that he was, my nephew pointed out, “why is a death cross important if there was already a downtrend that looked like it started in April?”
Exactly.
Bitcoin’s price had been trending up since October 2020, trading above the 50-day and 200-day moving averages that also sloped up in response.
The trend really started to change in April when bitcoin crossed below the 50-day MA. No doubt, price did bounce back above $55,000, but if there were any new short positions on the earlier way down, stop loss orders would have mitigated the risk.
The bottom line was that waiting around for a death cross to happen — just to confirm something that everybody can see had already happened — seems pretty silly.
There is also one other reason why moving average crossovers are not particularly useful: Different exchanges and charting service providers have their own proprietary sources for price data.
This means two different charting platforms may have similar-looking chart shapes, but also have different open/high/low/close information, different ways of treating weekend data (or none at all), and different trading session times.
Let’s look at the following two charts, one from TradingView and another one from MetaTrader 5, both showing bitcoin trading over roughly the same time period.
Both charts show a similar shape over the same time period. I used the same 50–200 MA setups on both charts, and the MAs don’t even cross at the same time.
If or when a death cross happens, whose chart do we even look at? And does the death cross even mean anything anymore?
So What’s The Best Way To Use Moving Average Crossovers?
Disclaimer: I don’t use MA crossovers. But if I did, I would do the following:
If I wanted to ride trends, I would wait for a trend to start. Price should be moving in one direction, and the MAs I use should be trending in the same direction as well. Let’s assume I will use the much-vaunted 50–200 MA combo.
I would use trailing stops to take profit and/or stop losses. A trailing stop is a stop order that is gradually moved forward and tracks the price of a given commodity as it moves in one direction.
So if I bought bitcoin at $35,000, for instance, I would leave a stop-loss order at, say, $32,600. If price continues to rise thereafter, for example beyond $40,000, I would move my stop forward to breakeven at $35,000 and continually move my stop — i.e. let my stop “trail” bitcoin — as price moves higher. Hence the term “trailing stop.”
When price eventually crosses into the 50-MA, I would be prepared to look for ranges to trade. But even then, I would always range trade in the direction of the new “trend,” until the new trend reverses course to resume the prior one, or until the 50-MA crosses into the 200-MA.
In the latter case, I would then ride the emerging trend and put in place fresh trailing stops in the new direction.
The above tactics can be applied by active traders. Long-term hodlers may also apply similar tactics while strictly ensuring they have a trailing stop regimen in place.
So whether a bitcoin death cross happens (or not), does it really matter?
Here’s my biased take on the whole thing.
I’ve traded financial markets for more than 25 years. Indicators or chart patterns that are “closely watched’’ by mainstream financial news outlets like WSJ, Bloomberg, and Reuters are also used by junior analysts for the consumption of C-suite audiences.
There is absolutely nothing wrong with that, of course. I don’t blame junior analysts when they look for sexy terms or magic-sounding widgets (like death crosses and golden crosses) to describe marketplace phenomena.
They need such things to confirm their internal biases, or maybe just to feel better.
Professional traders, however, know better. Institutional traders, even more so.
Sometimes, the simple and the obvious is best.
Or as Occam’s razor states: “the simplest solution is almost always the best.”
Let’s end with the simple and the obvious:
Moving average lines are “lagging indicators.”
Moving average crossovers are lagging indicators of a lagging indicator.
And traders on the front lines don’t look at crossovers.
All displayed chart support/resistance lines are either historical levels or actual confirmed order book levels currently being traded by major players based on available market intelligence.
The above opinions do not necessarily represent the collective view of Quantum Economics. Any errors in the analysis are my own.
Disclaimer: This content is for educational purposes only. It does not constitute trading or investment advice. Past performance does not indicate future results. Do not invest more than you can afford to lose.
If you found this content interesting, and have an interest in commissioning content of your own, check out Quantum Economics’ Analysis on Demand Service.
