Double Death Cross Strategy – Deadly Accuracy Trading
The death cross strategy will help you take control of your trading and help you predict with deadly accuracy when the stock market crash will happen. The double death cross is an improved trading strategy that can be used to determine when a short-term or long-term bearish trend will start.
We often hear references of the death cross on CNBC or Bloomberg and on your twitter feed as well, but there are a lot of things that they won’t tell you about the death cross. Specifically, they won’t give you a systematic death cross trading strategy and that’s big because you don’t want to second guess our trades.
In theory, the death cross is signaling a possible shift in the trending sentiment from a bullish trend to a bearish trend. The death cross happens when a short-term moving average the 50-day EMA crosses or breaks below a long-term moving average, 200-day EMA.
The good news is we tweaked and improved the death cross trading strategy so it can work across all asset classes (stocks, commodities, Forex, and cryptocurrencies).
Before we go into the real heavy stuff, let’s first define what is death cross and how to make money using the death cross.
What is a Death Cross?
The death cross stock trade occurs when the 50- day moving average crosses over the 200-day moving average. The death cross has all kinds of ramifications and it’s a strong bearish signal that has lead in the past to the stock market crash.
The opposite of the double cross signal is the golden cross signal.
See the death cross stocks chart below:
We shouldn’t place too much weight on the death cross signal because over the past few years the death cross stocks have produced many false signals that have cost Wall Street tens of millions of dollars in losses.
Next, we’re going to reveal a trade secret that will save you lots of money. It will also teach you the way professional traders and smart money trade the death cross.
Are you ready?
The death cross has a deadly accuracy only when the two moving averages come together and the price converges together with the two MAs. At that point, you should be looking for the price moving to the downside.
In other words, if the death crossover happens close to the price it has higher chances of signaling a stock market crash. The death cross stocks chart above highlights this pattern very clear; both moving averages and the price converges together at the moment of the crossover.
Please, see the death cross stocks chart below to see the difference between the two opposite trading scenarios:
Now, before we go any further, we always recommend taking a piece of paper and a pen and note the rules of this entry method.
For this article, we’re going to look at the sell side.
Double Death Cross Strategy
The double death cross strategy employs one more moving average that will help you anticipate when the death cross signal will occur. The third moving average is the 100-day MA, which is a medium-term MA situated between the other two moving averages.
Read more about EMAs in the exponential moving average strategy guide.
As long as the risk can be defined and limited the double death cross strategy can be applied to your favorite asset classes, not just stocks.
Please note that the double death cross pattern is best spotted on the Daily time frame.
Without further ado, this is the step-by-step guide into trading the double death cross signals:
Step #1: Wait for the 50-day EMA to cross below the 100-day EMA. The two moving averages also need to converge with the price action. You can read more about day trading price action here.
If we get the crossover of the 50-day MA (blue line) and 100-day MA (orange line) at the same time the price is testing those moving averages like it’s doing on the GBP/USD chart below, that’s the best-case situation for trade because we can define the risk.
The rule you need to keep in mind is that when the MAs converge with the price you have to get ready for the ride because it is going to get BUMPY!
Let’s determine now the appropriate entry strategy of the double cross trading strategy.
Step #2: Multiple entry strategy: Sell1 when we close below 50-day MA and 100-day MA. Sell2 when we break and close below 200-day MA.
Using multiple entries to improve your average entry price can be the best way to approach the death cross signal. Scaling into a position is our preferred trading method when looking to capture a large price move in a currency pair.
The fact that the price was near the death cross signal, it created tension in the market that eventually will lead to a sharp move to the downside.
We pull the trigger on the first half of the trade once we close below the 50-day and 100-day moving averages.
If at the moment when the death cross developed we’re already trading slightly below the two moving averages, sell at the market the moment we close below.
The second half of our position is entered once we break and close below the 200-day moving average.
This is not a bad trade!
**Note: It’s important to remember that the success of the death cross signal relays on this simple trade secret that price and the two moving averages need to converge.
Keep it 'simple stupid' is not just a simple aphorism, but it’s an old truth that can make the difference between losing and making money trading.
This brings us to the next important step that we need to establish for our long-term trading strategy, which is where to place our protective stop loss.
Step #3: Hide your protective Stop Loss above 50-day MA and 100-day MA
The most important thing we need to define when trading is our risk. If you want to be a profitable trader you really need a limited risk. This is the type of death cross trades that we want to pull the trigger on.
If the price were to move back above those moving averages, we can safely assume this is yet another false trade signal. In this trade case scenario, we’re risking a little and our reward is potentially much bigger.
So, the best place to hide your protective stop loss is above the 50-day MA and 100-day MA.
Last but not least, we need to define where we take profits.
Step #4: Two-step process for the take profit strategy: Mark on your chart the high of the candle when the 50-day MA crossed below 200-day EMA. Take profit when this high is broken.
Our take profit strategy might seem a little bit complex, but once we break down the steps you need to follow, it will make more sense why we’ve chosen this approach.
The first thing you have to do is to remember what we said at the beginning of the article which is that when the price doesn’t converge with the two MAs this is a death cross false signal.
In the example below, we can observe this type of price action.
Now all you have to do is to mark the high of the candle when the death cross happened and take profit as soon as the high gets broken.
**Note: The above was an example of a SELL trade using the death cross strategy. Use the same rules for a BUY trade – but in reverse, in which case we have the golden cross trading strategy. In the figure below, you can see an actual BUY trade example.
Conclusion - Death Cross Stocks
Following the death cross trade signal can be a very efficient approach to identify bearish sentiment in the market. If you want to switch from short-term trading and try capturing larger trends the double death cross trading strategy can help you achieve your goals.
You must know that the death cross definition is universally applicable to any other asset classes. We can have a death cross crypto or a death cross gold the same way we can have a death cross S&P 500. Capturing and detecting bearish trends can be a hard task because downtrends are typically different than bullish trends. However, the double death cross strategy gives you a systematic way to tackle bearish trends. Be sure to read our Best Trading Strategy guide!
Thank you for reading!
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