The death cross explained: A quick guide to the powerful crypto indicator
To be a successful trader within the cryptocurrency market, traders must be able to spot certain market trends before they develop. To achieve this, they must rely on two types of analysis. The first is fundamental analysis, which concerns market sentiment and the factors that impact it. The second is technical analysis, which focuses on an asset's price and volume.
Usually, technical analysis involves spotting chart patterns that can signal what will happen next. A death cross is a common technical analysis pattern that usually announces the onset of a bear market or downwards trend. This guide will explain what a death cross is, what it tells you and how to spot one.
What is a death cross?
To understand what a death cross is, we must first explain the moving averages (MAs). A moving average is a line plotted over a price chart. It measures the average price of an asset over a specific period of time. For example, a 50-day moving average measures the average price of a cryptocurrency in the last 50 days. While moving averages are a commonly used tool within crypto technical analysis, they actually derive from other financial markets.
We can start noticing patterns based on moving averages when we look at the cryptocurrency price chart. For example, when a short-term MA crosses below a long-term MA, it tends to apply downwards pressure on the price action. This particular set up is known as a death cross.
What do death crosses tell you?
The death cross is a signal that the bull market or an upwards trend is coming to an end. The death cross is widely regarded as a bearish signal, and historically has appeared many times before major economic downturns.
This is why traders tend to rely on death crosses to predict market trends. It’s a very useful technical analysis tool as it indicates when a bull market is coming to an end. This is often considered the time to sell and close positions before the price drops.
How to spot a death cross
There are usually three phases to a death cross.
- The Lead-Up
The first phase is when the price action consolidates following a major upswing. At times, it can break out and continue going up. However, the price takes a sharp turn in most scenarios and starts dropping. This is the consolidation period, and it's the first clue that a death cross is on the horizon. During this stage, the 50-day MA is still above the long-term 200-day MA.
- The Death Cross
The second stage is when the death cross actually occurs. This is the point where the short-term MA crosses below the long-term MA. This creates a bearish backdrop for the market and traders become fearful. It’s also worth pointing out that this can also serve as an opportunity, as certain traders decide to short the market at this point.
- The Downward Swing
The third and final stage of the death cross is the downward swing. This is when price action continues to head lower after the two moving averages diverge. Depending on the market structure, the short term MA may also act as a point of resistance for the asset.
Are death crosses reliable?
While death crosses sound useful for traders, they have their downsides. One of the downsides is that death crosses may provide false signals. In 2016, a death cross occurred within the market, and investors were prepared for the worst. However, the market trends did not change as expected. Therefore, a death cross can be reliable, however, they don’t always play out as traders anticipate.
Pros and cons of analyzing death cross patterns
Just like all the other indicators/ trading strategies out there, death crosses have their pros and cons, for example:
Pros
- Serves as an indicator of a long-term market trend change
- It can help manage volatility
- It is easy to spot and use to your advantage
Cons
- Sometimes provides false signals
- Recommended to use it paired with other indicators
- Lagging indicator
As you can see, the death cross has its advantages and flaws. It’s become an increasingly popular tool to use thanks to its success rate within the Bitcoin chart. The death cross has appeared several times in Bitcoin’s chart. Every time to date, the price drops after the cross makes an appearance. Traders who adjusted their trading strategies to include the death cross have avoided major price crashes. A death cross is also easy to understand, identify, and use.
On the other hand, no technical indicator is perfect. The death cross might have a decent track record, but it still comes with a few flaws. Technical traders sometimes refer to it as the lagging indicator. As the native price action tends to occur prior to the death cross.
Examples of death cross trading strategies
There are several trading strategies revolving around death crosses. Of course, combining the death cross with other indicators is the most effective way to use it. No matter the accuracy death crosses have displayed, making a move based on one indicator is not recommended.
Here are a few examples of how you can combine the death cross with other indicators to elevate your trading strategy.
A surge in volume
Once you suspect a death cross might take place, you can check another indicator — trading volume. If the volume is high when the death cross begins to form, it’s statistically proven to be a more reliable bear market signal, as high volume suggests that a significant trend reversal is coming.
The fear index
The CBOE has created a volatility index (VIX), otherwise known as the fear index, which measures fear in the market. It can provide a useful insight to how investors are feeling at any given time. Fear is considered to be high if the fear index’s score is above 20. If it was to reach 30, and you identified a death cross, the possibility of a price correction increases significantly.
The RSI
The relative strength index indicator, or RSI, is another important tool you can combine with a death cross. The RSI measures whether an asset is overbought or oversold. If you see that the asset is overbought and you identify a death cross, the price is likely to reverse.
Check the MACD
Since death crosses depend on moving averages, the MACD is a tool you can’t avoid. Known as the moving average convergence divergence indicator, the MACD shows if a trend is losing momentum or picking up pace. It can also give you an insight to whether the market is bearish or bullish.
Death cross in crypto: The final verdict
Technical analysis is not simple, but it can be very useful if you understand it. It can help you make reliable predictions and warn of upcoming market changes. Given how volatile the crypto market can be, being able to spot trend reversals as quickly as possible is crucial.
Death crosses have always appeared before major drops. Sometimes, they might appear without the price drop. There are even cases where they appeared after a drop has happened. However, any hint of an upcoming bear trend is helpful.
FAQs
What is a death cross in crypto?
A death cross is a signal that the market is about to turn bearish. It happens when the short-term moving average crosses under the long-term moving average. This is a signal that the price is about to drop.
Is the death cross good or bad?
A death cross is neither good nor bad. It is a market event that you can identify and use to your advantage. By knowing what is coming, you can prepare for it and take steps to trade effectively.
Is a death cross bearish?
Yes, a death cross is a signal that the bear market is approaching. However, there have been instances where the bearish wave failed to show up after a death cross. This is why some believe that the correct predictions have been purely coincidental.
How long does a death cross last?
A death cross follows two lines - a 200-day MA and a 50-day MA. Since they are longer time frames, they aren't affected by short-term volatility.
