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Death Cross – Best Tips For Trading The Death Cross

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The death cross is a technical indicator which indicates a short-term moving average of a security crosses below its long-term moving average.

The death cross is often getting huge media coverage to warn people about a bear market or an upcoming economic recession. The main death cross which everybody uses is when the 50 MA crosses below its 200 MA.

Death cross can be used in different time frames. Swing traders use higher time frames (6h, 12h, daily, etc) and day traders use lower time frames (5m, 10m, 15m, etc) to open a short position and benefit from death cross in charts.

The death cross name derives from the X-shape created when the faster MA goes below the slower MA.

Whenever you see a death cross in higher time frames specially daily time frame, it can indicate a major trend shift toward lower prices. In fact, the death cross not only can be a sign of a big sell-off but also beginning of a bear market.

What is The Death Cross in Trading?

Generally, a death cross has three stages which we explained them in below.

  1. When an uptrend finished, and price reached to previous or new highs, there would be a big gap between the faster moving average (50 MA) and the slower moving average (200 MA).
  2. Usually, little later candlesticks get red and price starts to fall, and if the price continues to go down, the 50 MA will cross below the 200 MA to fill the gap between them.
  3. Then, the downtrend will begin and 50 MA or 200 MA will act as a resistance for the price and will force it to go even lower.

Finally, the downtrend will finish when the golden cross happened. The golden cross is opposite of the death cross and it occurs when the short-term moving average (50 MA) crosses above the long-term moving average (200 MA).

S&P 500 Death Cross History

The S&P 500 is a stock market index based on the market capitalizations of 500 large American companies.

The death cross happened many times in the S&P 500 history, and 34th death cross (from 1950 to February 2019) just happened lately .

In the below image we represented three stages of the death cross on S&P 500 daily chart during late 2018.

After the price marked a new all-time high it went down because of the macroeconomic conditions. then the death cross happened and the price went lower. So the price found a temporary bottom and if it can maintain its uptrend, we’ll have another golden cross soon.

although, the bear market can continue further and cause an economic recession in upcoming months.

death cross three stages on S&P 500 in 2018
The death cross three stages on S&P 500 index in late 2018

What is Shorting in Death Cross Trading?

Shorting a security means borrowing shares from an exchange to sell them in proper levels in order to profit from a price drop.

in fact, having a margin account enables you to sell a security even if you don’t own it.

Traders try to open a short position whenever they see a death cross on a chart. Or they would sell their shares, securities, etc. to buy it again at lower prices.

Death Cross and Bearish TK Cross Comparison

The concept of death cross exists in other indicators like the Ichimoku cloud too.

In the Ichimoku cloud, we have a bearish TK cross strategy which is similar to the death cross and it indicates the trend shift toward the downside.

Tk cross happens when Tenken which is the faster moving average crosses below Kijun which is the slower moving average. you can learn details of this strategy on Ichimoku cloud article.

By the way, the important tip is that bearish TK cross can give you better short entry signals than the death cross. also, Ichimoku cloud can show you dynamic support/resistance which helps you to open a position with higher success probability.

We analyzed many charts for this comparison, and we chose British pound/Dollar (GBPUSD) price chart on the daily time frame.

the death cross and the bearish tk cross entry signal comparison

Comparison of the Death Cross and the bearish tk cross entry signal on GBP/USD

We represented both the death cross and the bearish TK cross in the above image. As you can see the bearish TK cross gave a short entry signal sooner than death cross.

Moreover, by using the bearish TK cross strategy, you’re more aware of main support/resistance zones which could help you manage your risks better.

Death Cross Vs. Golden Cross & Silver Cross

as we mentioned earlier, the golden cross is opposite of the death cross. but the silver cross has a different explanation and we define them in below sentences.

  • Death Cross: 50 MA crosses below its 200 MA
  • Golden Cross: 50 MA crosses above its 200 MA
  • Silver Cross: 50 MA crosses above its 100 MA

maybe yous think it’s a lame naming and traders just try to make specialized terms for themselves. but in next section we’ll explain a strategy which show you why sequence matters in trading with moving averages.

Death Cross and moving averages Cascade strategy

when beginners start trading, they usually have some difficulties to understand different time frames on charts.

In a simple definition, time frames help traders to focus on micro or macro price action. in other words, If you’re a day trader you should focus on lower time frames, but if you’re a swing trader or position trader you should focus on higher time frames.

Moving averages can help you to identify price trends better through different time frames, and golden cross, death cross or silver cross come to play here.

Death Cross On Dow Index (Case Study)

when markets trend starts to change you can see their first signs in lower time frames. therefore, you should check moving averages cross over in lower time frames and follow their cascade effect to know whether its trend continues on higher time frames or not.

To understand this strategy pay attention to the below image.

death cross on different time frames of dow jones industrial average chart
Death cross on different time frames of Dow index chart

We explained our strategy in the Dow Jones Industrial Average case study which happened through US-China trade war. Also, We used faster EMAs like 8,13 and 21 which actually are Fibonacci numbers and besides that, we used slower EMAs like 50, 100 and 200 too.

If you check death cross on different time frames, you’ll realize the first signs of a bearish trend occurred first on lower time frames like 15m.

As we represented in the above image, we had death crosses in this order: 15m, 1h, 2h, and 4h. Then after price ranged for a few days finally, we had a death cross on the daily time frame.

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