Death Cross Pause Forex Trading Strategy

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Death Cross Pause Forex Trading Strategy

Sometimes, it pays being aggressive, risk taking and unconventional. Sometimes, what most see as trouble might actually be an opportunity for those who see things differently. Sometimes, glory goes to the brave.

The Death Cross is one of the gloomiest doomsday scenario for an asset for most traders, whether be it stocks, fixed income, commodities, and even forex. It usually means losses due to the fact that the market is in chaos during these scenarios.

So, what is it really? It is basically a market condition when the moving averages seem to be in shambles. But in reality, it is just basically the short-term moving average crossing over the longer-term moving average. But this is not the usual crossover strategy. This is THE CROSSOVER. The crossover of the most popular moving averages – 50 EMA, 100 EMA and the 200 EMA. During this market condition, the usual stacking of these three moving averages during a regular slightly trending market scenario goes haywire. However, if you’d look at it closely, it is basically just the 50 EMA crossing over the 100 & 200 EMA in a rather short period of time.

Basically, the crossover is a doomsday to those who are riding the trend. This is because the Death Cross is a signal of a reversal of trend. For price action traders, this usually coincides a breakout or breakdown of a long-term diagonal trend. So, there it is. Basically, it is a reversal scenario.

But before you take out your best reversal scenario strategies, take note that these strong trend shifts, although they usually become another trend to the reverse side, whipsaws occur during this market condition. This is why trading during the Death Cross is quite dangerous to your account.

But all is not lost. There are quite some opportunities during this market scenario.

For a Death Cross to be successful, a strong reversal momentum must occur along with a reversal of trend on the lower timeframe. You would notice that candles prior to the Death Cross are one directional going against the trend. Then, price pierces, breaks through and crosses over all three moving averages. Then, the moving averages’ stack goes in shambles. At this point, much of the market sees the impending Death Cross and goes into panic mode. Because of this panic mode, the market starts to freeze for a short time. The strong reversal momentum finds itself stalling for a slight retracement beyond the moving averages. Then, the market realizes that the trend has changed, and momentum continues further. This is our opportunity. That slight pause from a strong momentum. A quick and short retracement, then we enter going the direction of the reversal momentum.

The Setup: Death Cross Pause Strategy

In this strategy, we will be using just three Exponential Moving Averages (EMA):

  • 50 EMA (gold)
  • 100 EMA (green)
  • 200 EMA (brown)

Again, what we will be looking for is for price to crossover the stack, while the 50 EMA shows signs of piercing the two longer-term EMAs. Then, we wait for price to retrace. Our trigger would be the first candle that closes going the direction of the Death Cross. This should either coincide or is just a few candles after the crossover of the 50 EMA and the longer-term EMAs.

Timeframe: any

Buy Entry:

  • The EMAs should be stacked in the following order prior to the Death Cross:
    • 50 EMA – bottom
    • 100 EMA – middle
    • 200 EMA – top
  • Price should cross above all three EMAs
  • 50 EMA should bend upwards heading towards the 100 & 200 EMA
  • Price should retrace for a few candles
  • Price should still be above the three EMAs
  • 50 EMA should cross above the 100 & 200 EMA
  • Enter a buy market order on the first bullish candle

Stop Loss: Set the stop loss at the fractal below the entry candle

Exit: Close the trade on the first bearish candle close

Sell Entry:

  • The EMAs should be stacked in the following order prior to the Death Cross:
    • 50 EMA – top
    • 100 EMA – middle
    • 200 EMA – bottom
  • Price should cross below all three EMAs
  • 50 EMA should bend downwards heading towards the 100 & 200 EMA
  • Price should retrace for a few candles
  • Price should still be below the three EMAs
  • 50 EMA should cross below the 100 & 200 EMA
  • Enter a buy market order on the first bearish candle

Stop Loss: Set the stop loss at the fractal above the entry candle

Exit: Close the trade on the first bullish candle close

Conclusion

This strategy, although very risky, could mean some profits to those who are willing to take the risk. A big chunk of the market would try to avoid it due to the choppiness and indecisiveness of the market during these market conditions.

The buy sample was a good example of how the market trend change would continue much longer after the Death Cross. Several more trading opportunities were available using other trending strategies after the buy trade. However, trading the Death Cross is not a bed of roses.

If you would notice on our sell sample, price did push through to give us a profit, but the second retrace was deeper. Then, after that, a much deeper retrace. After the deep retraces were whipsaws. This is the kind of market choppiness that you would face during the Death Cross. So, trade at your own risk.

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