Every Forex trader dealing with moving averages (which means pretty much every single Forex and Bitcoin trader in the world) has to get familiar with crossovers and learn how to interpret them. For those of you who are new to this thing, a crossover occurs when the price of a currency (or another type of instrument) intersects with the indicator, which in turn means a change in a trend of some sort. It could be small or huge, short-term or permanent. In most cases, these changes are relatively short-lived and limited in scope, but every now and then, there is a crossover between a short-term and a long-term moving average. This can either be a Golden cross or a Death cross, depending on the circumstances. What they have in common, however, is the fact that both foreshadow some major events in the life of a trend.
A Golden cross is a type of crossover when the short-term moving average crosses the long-term MA and gets above it. Short-term moving average usually involves a 15-day period, while long-term moving average involves a 50-day period, although there are no strict rules in place for this sort of thing. In any case, when a Golden cross is identified, it is perceived as a signal to buy as much as possible, as the sheer volume of the trade on the market is expected to explode, yielding potentially unbelievable profits, if you play your cards right. When this happens on a Forex market, it means the market is turning in favor of a particular currency.
On the opposite end of the spectrum, we have a Death cross, a type of crossover where the short-term MA crosses the long-term MA but plummets downward instead. Again, the lengths of ‘short’ and ‘long’ periods may be up for discussion, but what follows a Death cross is not. When this happens, people generally sell and don’t look back. In Forex markets, this means everybody who relies on MA is going to assume a bearish position on the currency (pair) in question. Even if you don’t believe in these things, everybody else does and will act accordingly. In other words, the price is going to plummet very soon and very hard. Like with the Golden cross, the trading volume will increase, albeit in different direction.
What does this mean?
Well, as stated previously, there are no set rules on the lengths of ‘long’ and ‘short’ periods. In fact, the shorter they are, the more prone to ‘crossovers’ they get, due to an increase in volatility. This means that jumping on the buying/selling wagon prematurely is not always a good idea. More and more Forex traders make a compromise between maximum profits and maximum security and thankfully, most of the regulated Forex brokers assist them. They typically wait until the currency pair is at least 10% above or below the moving average to make sure it is not a false alarm. The profits are not ideal, although added safety is usually worth it.