In the graph, you’ll see three simple moving averages, the 50, 100, and 200 SMAs.
These are represented by the Light Blue, Purple, and Orange colored lines respectively. So, as you can see, they give an average of the previous prices. They plot the previous prices on the line giving you a reference you can base your trading on.
Exponential Moving Average (EMA)
The exponential moving average depends hugely on the more recent prices of the instrument being traded or studied. The EMA thus gives a higher weighting to recent prices, while the SMA assigns equal weighting to all values.
In the graph, you’ll see three exponential moving averages, the 50, 100, and 200 EMAs. These are represented by the light blue, purple, and orange colored lines respectively. They differ in trajectory than the SMAs since the EMAs are putting more weight on current prices than on old prices, so they might be giving a different outcome, it’s up to you to decide which one you like best.
The Golden Cross and the Death Cross
These two indicators express if the market is bearish or bullish. A golden cross signals a long-term bull market that’s still rising, while a death cross indicates a long-term bear market. What’s common between them, is that they both show a long-term trend by the occurrence of a short-term moving average crossing over a major long-term moving average.
For the golden cross to happen, a short-term moving average needs to cross over a major long-term moving average to the upside. This is interpreted by analysts and traders as signaling an upward turn in the markets. Technically, the short-term average trends up faster than the long-term average, until they cross.
Nothing beats an example, so here it is:
We see that the short-term Moving Average (light blue line) broke through the long-term Moving Average (orange line) upwards. The crossover was neat and clean signaling that the positive momentum on this instrument is building, and that’s what happened, as the cross appeared and EURUSD skyrocketed higher after that.
This is the complete opposite of the Golden Cross, so a downside moving average crossover constitutes the death cross and is understood to signal a decisive downturn in a market. When a short-term average trends down and crosses the long-term average, the death cross occurs. In other words, a Death Cross goes in the opposite direction of the Golden Cross.
Let’s take an example:
As you can see in the above image, the short-term Moving Average (represented by the light blue line), crossed the long-term Moving Average (represented by the orange line) downwards. This triggered a move lower on EURUSD. The cross was clear and signaled that the time to short this instrument is near and low. Behold, the prophecy has come true!
Death crosses are very helpful indicators because they come before the economic downturns. This is exactly what happened in 1929, 1938, 1974, and 2008 before the economic downturns.
Check out our second Technical Analysis Article, the Relative Strength Index.
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