Understanding the Double Death Cross Strategy

The double death cross strategy aims to earn sizeable profit from multiple entries during strong downtrend.

The term "death cross" refers to recent price weakness as indicated by the decline of a short-term Moving Average below a longer-term Moving Average. The crossover between 50-day and 200-day Moving Averages is the most extensively monitored death cross in the market.

The death cross, despite its foreboding moniker, is not a market milestone to be feared. It tends to presage a near-term bottom in sentiment. Therefore, we can use the double death cross strategy to gain optimum benefit from falling prices.

Why is the Double Death Cross Strategy Important?

Traders can theoretically place a short position after the death cross pattern is confirmed on the chart, then let it run to the bottom. However, we should not place a short position too long after the death cross has formed.

Market history showed that the bottom that appeared soon after the death cross tended to precede a near-term rebound with above-average returns. Only when 50-day MA and 200-day MA converge with the price did the death cross have lethal accuracy. Such a formation ensures the accuracy of the bearish signal, or else, the death cross will have weaker significance.

Of course, not all non-converging death crosses are followed by a market rebound. During a strong downtrend, we may also find death crosses that are followed by successive bottoms below Moving Average lines. The double death cross strategy aims to earn sizeable profit from multiple entries in this type of market sentiment.

How to Apply the Double Death Cross Strategy?

First and foremost, apply three Moving Averages on the candlestick chart. Set up 50-day, 100-day, and 200-day Moving Averages on a Daily timeframe. The screenshot below shows the three MAs in different colors, respectively red, blue, and orange, on BTC/USD chart.

Next, see where Moving Averages and prices are. We can see the first death cross where the 50-day MA crosses below the 100-day MA. The two MAs do not converge with prices, but prices move below both MAs. This ensures us that the market firmly develops a strong downtrend.

Open the first short position after the first death cross, then open the second short position when prices have moved further down and closed below the 200-day MA.

The last step, place your Stop Loss above the 50-day MA when you open each short position. It might be tempting not to use Stop Loss at all, but wise traders always limit their risks. After that, keep your position afloat as long as prices continue to fall.

When should we take profit? Mark price levels where the 50-day MA crosses below the 200-day MA. When prices rebound up to that point, you should close the position. The example we are currently examining coincides with psychological level 4400. Otherwise, you can also close the position whenever it suits your risk/reward setup.

We can also use the double death cross strategy for stocks and forex trading. Just remember that it should be used during a market downtrend only, which is characterized by price movement below the Moving Average line.