Moving average convergence divergence, also known as MACD, is a trend-following momentum indicator widely used by traders. Although MACD is a lagging indicator, it is very useful in identifying possible trend changes.
MACD oscillates above and below the zero line (also called the center line). Subtract the shorter moving average from the longer moving average to get the value of MACD. A signal line, namely MACD’s exponential moving average, completes the indicator.
The blue line is the MACD and the red line is the signal line. When the blue line crosses the red line, it is a buy signal, and when the blue line breaks below the red line, it is a sell signal. A cross above the center line is also a signal to buy.
Let’s take a look at how to use indicators to better enter and exit the market from various positions. Later, we will study how to analyze MACD in pullbacks and uptrends. Finally, we will briefly understand the importance of MACD divergence.
Adapt the indicator to the fluctuations of the crypto market
Compared with traditional markets, cryptocurrencies have witnessed huge changes in a short period of time. Therefore, entering and leaving the market should be able to quickly capture most of the trend, but there is not much wash trading.
When a new uptrend begins, it usually lasts for weeks or months. However, each bull market stage has its share of corrections. The trader’s goal should be to keep up with the trend, not to be blocked by every small pullback along the way.
The goal should be to enter a position as soon as possible when a new uptrend begins, and maintain the position until a trend reversal is signaled. However, easier said than done. If the indicator gives too many signals, there will be some unwanted transactions, which will generate a lot of commissions and consume a lot of sentiment.
On the other hand, if the selected time frame provides fewer signals, you may miss most of the trends because the indicator will be slow to recognize reversals.
MACD creator Gerald Appel solved this problem in his book “Technical Analysis: A Powerful Tool for Active Investors”.
Appel emphasized how to use two MACD indicators during a strong trend, one more sensitive for entry and the less sensitive one for exit.
Are two MACDs better than one?
The default value used by most charting software for the MACD indicator is a combination of 12 to 26 days. However, for the following example, let’s use a MACD with a combination of 19 to 39 days, which is less sensitive and will be used to generate sell signals. The second one will be more sensitive, using a 6 to 19-day MACD combination, which will be used for buying signals.
Bitcoin (Bitcoin) Trading within a small range in September 2020, during this period, the two MACD indicators were basically the same. In October, as the BTC/USDT pair began an upward trend, when the indicator crossed the center line in mid-October 2020, MACD issued a buy signal.
After entering the trade, observe how the MACD approached the signal line (marked as an ellipse on the chart) four times on the sensitive 6-19-day MACD combination. This can lead to an early exit, because the uptrend has just begun, so leaving most of the gains on the table.
On the other hand, please note how the less sensitive 19-39-day combination remains stable in the upward trend. This may make it easier for traders to keep trading until the MACD breaks below the signal line on November 26, 2020, triggering a sell signal.
In another example, Binance Coin (Bitcoin) Crossing the midline on July 7, 2020, triggering a buy signal. However, as the BNB/USDT currency pair entered a slight correction, the sensitive MACD quickly fell back and broke the signal line on July 6.
In contrast, the less sensitive MACD has remained above the signal line until August 12, 2020, occupying most of the trend.
Traders who find it difficult to track the two MACD indicators can also use the default combination of 12 to 26 days. Litecoin (LTC) The journey from approximately $75 to $413.49 generated five buy and sell signals. All transactions have generated good entry (marked by ellipses) and exit (marked by arrows) signals.
How MACD issues a correction signal
Traders can also use MACD to buy callbacks. During the upward trend correction period, the MACD fell to the signal line, but as the price resumed its upward trend, the MACD rebounded from the signal line. This kind of formation that looks like a hook can provide a good entry opportunity.
In the example above, Cardano (Have) Crossing the midline on January 8, 2020, indicating a buy. However, as the uptrend stalled, MACD fell near the signal line on January 26, 2020, but did not break below the signal line. As the price rebounded, MACD broke away from the signal line and resumed its rise.
This provides an opportunity for traders who may miss buying crosses above the center line. The sell signal was generated on February 16, when the ADA/USDT currency pair began a deep correction.
MACD divergence can also indicate trend changes
The price of Bitcoin continued to make higher highs from February 21 to April 14, 2021, but the MACD indicator made lower highs during this period, forming a bearish divergence. This is a sign that momentum is waning.
When a bearish divergence is formed, traders should become cautious and avoid long trading during this period. In this case, the long-term bearish divergence ended in a sharp decline.
Litecoin shows how MACD formed a bullish divergence during the strong downtrend from July to December 2019. Traders who bought a crossover above the midline may be washed out again in September and November.
This indicates that traders should wait for price action to show signs of changing its trend before taking action on MACD divergence.
Some important points
The MACD indicator captures trends and can also be used to measure the momentum of an asset. Depending on market conditions and the assets being analyzed, traders may change the MACD cycle settings. If the coin is moving fast, the more sensitive MACD can be used. For slow-moving people, you can use the default settings or a less sensitive MACD. Traders can also combine the less sensitive and more sensitive MACD indicators to obtain better results.
However, there is no perfect indicator that can always be effective. Even with the above permutations and combinations, the transaction will be contrary to expectations.
Traders should deploy fund management principles to quickly reduce losses and protect book gains when the transaction proceeds according to assumptions.
The views and opinions expressed here only represent the views of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading action involves risk, and you should conduct your own research when making a decision.