What Is a Crossover in Technical Analysis, Examples
What Is a Crossover?
The crossover is a point on the trading chart in which a security’s price and a technical indicator line intersect, or when two indicators themselves cross. Crossovers are used to estimate the performance of a financial instrument and to predict coming changes in trend, such as reversals or breakouts.
Common examples include the golden cross and death cross, which look for crossovers in different moving averages.
Must Know Points
- A crossover refers to an instance where an indicator and a price, or multiple indicators, overlap and cross one another.
- Crossovers are used in technical analysis to confirm patterns and trends such as reversals and breakouts, generating buy or sell signals accordingly.
- Moving average crossovers are common, including the death cross and golden cross.
Understanding Crossovers
A crossover is used by a technical analyst to forecast how a stock will perform in the near future. For most models, the crossover signals that it’s time to either buy or sell the underlying asset. Investors use crossovers along with other indicators to track things like turning points, price trends and money flow.
Crossovers indicating a moving average are generally the cause of breakouts and breakdowns. Moving averages can determine a change in the price trend based on the crossover. For example, a technique for trend reversal is using a five-period simple moving average along with a 15-period simple moving average (SMA). A crossover between the two will signal a reversal in trend, or a breakout or breakdown.
A breakout would be indicated by the five-period moving average crossing up through the 15-period. This is also indicative of an uptrend, which is made of higher highs and lows. A breakdown would be indicated by the five-period moving average crossing down through the 15-period. This is also indicative of a downtrend, composed of lower highs and lows.
Longer time frames result in stronger signals. For example, a daily chart carries more weight than a one-minute chart. Conversely, the shorter time frames give earlier indicators, but they are also susceptible to false signals as well.
Stochastic Crossovers
A stochastic crossover measures the momentum of an underlying financial instrument. It is used to gauge whether the instrument is being overbought or oversold.
When the stochastic crossover exceeds the 80 band, the financial instrument is determined to have been overbought. When the stochastic crossover drops below the 20 band, the underlying financial instrument is determined to have been oversold. This causes a sell signal to form. A buy signal is triggered when the crossover goes back up through the 20 band.
As with all trading strategies and indicators, this method of predicting movement is not guaranteed, but supplemental to other tools and instruments used to track and analyze trading activities. Surprise changes in the market can occur that render these findings useless or inaccurate. Also, data can be entered incorrectly or misinterpreted by investors, leading to the information that was provided by the crossover being inaccurately utilized.
Example: The Golden Cross
The golden cross is a candlestick pattern that is a bullish signal in which a relatively short-term moving average crosses above a long-term moving average. The golden cross is a bullish breakout pattern formed from a crossover involving a security’s short-term moving average (such as the 15-day moving average) breaking above its long-term moving average (such as the 50-day moving average) or resistance level. As long-term indicators carry more weight, the golden cross indicates a bull market on the horizon and is reinforced by high trading volumes. The opposite of a golden cross is a death cross.