What is a Death Cross?
A Death Cross is a way to look at the stock market or other investments - a technical indicator. A death cross happens when a trend line called the 50-day moving average goes below another trend line called the 200-day moving average. Think of it like two different measurements of how well the stock market is doing. The 50-day moving average is like a snapshot of the last 50 days, and the 200-day moving average is like a snapshot of the last 200 days.
When the 50-day moving average goes below the 200-day moving average, it's like the short-term measurement is doing worse than the long-term measurement. This is called a Death Cross because it's seen as a sign that the market might be going down, or 'bearish'.
But it's important to remember that the Death Cross is not always right. Sometimes, even after a Death Cross, the market can still go up and be 'bullish'. So it's just one way to look at the market, but not a definite answer.
For example, If stock market's 50 day moving average is going down and below 200 day moving average, it could be an indication of a bearish market. But it's not always right, as sometimes the market can still go up and be 'bullish' even after a Death Cross.
Simplified Example
Imagine you and your friends are playing a game of tic-tac-toe. Each time someone wins, they get to draw a line on the board. The goal is to have three lines in a row, either horizontally, vertically, or diagonally. Now, let's say that the lines on the board represent the price of a stock or a cryptocurrency.
When the price of the stock or cryptocurrency goes up, you draw a line going up, and when the price goes down, you draw a line going down. A "Death Cross" happens when one line, called the "moving average," crosses another line, called the "longer-term moving average," going down. This crossing is like a big red "X" marking the board, and it signals that the price of the stock or cryptocurrency might go down in the future. So, the "Death Cross" is like the "X" marking the end of the game of tic-tac-toe, signaling that it's not a good time to buy the stock or cryptocurrency because the price might go down.
History of the Term Death Cross
The term "death cross" emerged in the early 1990s within the realm of technical analysis, a discipline that employs charts and historical price data to identify patterns and predict future price movements. The term gained traction among traders who observed the recurring pattern of a short-term moving average crossing below a long-term moving average, often the 50-day SMA crossing below the 200-day SMA.
The term "death cross" became widely recognized in the late 1990s and early 2000s as technical analysts applied it to various asset classes, including stocks, currencies, and commodities. Its use extended to cryptocurrency trading in the 2010s, coinciding with the rise of Bitcoin and the broader cryptocurrency market.
Examples
Stock Market: In the stock market, a death cross occurs when the 50-day moving average of a stock's price crosses below its 200-day moving average. This signals a bearish trend and is often interpreted as a signal to sell. Investors and traders use the death cross to identify changes in the trend of a stock and adjust their portfolios accordingly. It is important to note that the death cross is a lagging indicator, meaning that it can confirm a trend change after it has already begun, rather than predicting one in advance.
Forex Trading: In forex trading, a death cross occurs when the 50-day moving average of a currency pair's exchange rate crosses below its 200-day moving average. This signals a bearish trend in the currency and can indicate a shift in market sentiment. Forex traders use the death cross to inform their trading decisions and adjust their positions in response to changes in the market.
Cryptocurrency Trading: In cryptocurrency trading, a death cross occurs when the 50-day moving average of a cryptocurrency's price crosses below its 200-day moving average. This signals a bearish trend in cryptocurrency and can indicate a shift in market sentiment. Cryptocurrency traders use the death cross to inform their trading decisions and adjust their positions in response to changes in the market. The death cross is a useful tool for cryptocurrency traders as it helps them to identify trends and make informed trading decisions in a rapidly evolving market.
Related terms
Day Trading: Day trading is a way of buying and selling assets quickly in order to make a profit.
Bear Trap: The meaning of bear trap refers to a trading strategy or pattern that is used by investors to take advantage of a downward trend in the market.