Many different tools and analysis methods help investors make more accurate decisions. One of the commonly used technical analysis tools is the MACD indicator. If you are new to cryptocurrency trading, learning and understanding how to use this indicator will be very helpful in your investment decision-making process. Follow the Crypto Trading article to better understand this indicator!
Basic information about MACD indicator
MACD is a trend-following momentum oscillator. It provides traders with information about the strength, direction, and momentum of the market. Here is what a newbie needs to know about the MACD indicator.
What is the MACD indicator?
MACD meaning? This is an important technical indicator, used by many investors in trading. MACD stands for “moving average convergence divergence”, and was created by Gerald Appel in 1979.
The MACD line will provide investors with signals about market fluctuations. It helps them determine the right time to buy or sell. To determine the MACD line, investors need to rely on the difference between the 12-day and 26-day EMA moving averages.
What is the formula for calculating MACD indicator – formula for calculating lines in the indicator
To calculate MACD full form, investors need to determine the indicator values for each component. The following exact calculation formulas need to be performed:
The MACD line will be calculated by the formula:
- MACD line is calculated = EMA (12) – EMA (26)
The signal line will be calculated by the formula:
- Signal line is calculated = EMA (9) of MACD line
MACD histogram line:
Calculated by the difference between the MACD line and the Signal line, according to the formula:
- Histogram is calculated = MACD Line – Signal Line
In addition, the Zero line is a reference line that helps investors assess the strength or weakness of the market trend. When the MACD line and the signal line intersect, it often signals that a trend reversal is about to occur.
The Meaning of MACD in Crypto Trading
The MACD indicator is a popular technical analysis tool in investing. Many financial experts use MACD to analyze the market and predict price trends. The role of the MACD line in crypto trading is as follows:
Forecasting market movements and price trends:
- Based on the convergence or divergence between the MACD line (blue) and the signal line (red). Investors can make appropriate technical analyses, combined with other information.
- The MACD line crosses above the signal line. This is considered a buy signal, indicating that the price will increase from the current level.
- The MACD line crosses down through the signal line. This is a sell signal, indicating that the price will fall.
Determine buying and selling points:
- Through the evolution of the MACD line and the price line, investors can determine appropriate buying and selling points.
See more: Know MACD for perfect crypto transactions
What are the advantages and disadvantages of using the MACD indicator in Crypto?
MACD is a fairly reliable indicator. Let’s consider the advantages and disadvantages of this indicator for investors when trading crypto!
Advantages of using MACD indicator
MACD helps investors identify reversals in market trends. It provides investors with information about the momentum of market trends. When MACD is combined with other technical indicators, trading will be more effective.
MACD can predict long-term trends with high accuracy. Investors should combine MACD with weekly time frames. For short-term traders, checking MACD on the weekly chart before entering a shorter time frame will help them grasp the main price trend. To ensure safety, it is not recommended to trade against the trend.
Disadvantages of using MACD
Although the MACD indicator is a popular and useful tool in market analysis. However, it still has some limitations that need to be noted:
- MACD is prone to generating false signals, leading to the risk of losses. MACD divergence and convergence also often cause misleading signals.
- MACD provides subjective data. Because each investor can set the relevant indicators according to their preferences and purposes.
- MACD is prone to giving delayed signals due to the lag between moving averages.
Purpose of using MACD indicator in technical analysis
MACD shows the convergence and divergence of two moving averages. Technical analysts will rely on the characteristics to determine market trends. From there, they will make effective trading decisions.
Using MACD to identify different buy and sell signals
The MACD indicator uses two main lines for technical analysis – the MACD line and the signal line. By monitoring the interaction between these two lines, investors can determine buy and sell signals.
Bullish Signal
- Occurs when the MACD line crosses above the signal line. This indicates that the price of the asset may start to rise.
- For example, if the 12-26 period MACD line crosses above the 9-period signal line, this could be a buy signal.
- How to identify on the chart: Find the intersection point between the MACD line and the signal line, if the MACD line goes up from below and crosses the signal line, it is a buy signal.
Bearish Signal
- Occurs when the MACD line crosses below the signal line. This indicates that the price of the asset may start to decline.
- For example, if the 12-26 period MACD line crosses below the 9-period signal line, this could be a sell signal.
- How to identify on the chart: Find the intersection point between the MACD line and the signal line, if the MACD line goes down from above and cuts through the signal line, it is a sell signal.
MACD can be used to identify divergences
An important sign that a current trend is about to end is when the MACD diverges. Watching for divergence is an effective way to determine good times to enter or exit the market. Specifically:
Positive Divergence
- Occurs when price makes lower lows but MACD makes higher lows. This is a sign that the price may rise again.
- How to identify: Compare the lows of price and MACD. If the price makes a new lower low while MACD makes a new higher low, it is a positive divergence.
Negative divergence
- Occurs when price makes higher highs but MACD makes lower highs. This is a sign that the price may fall again.
- How to identify: Compare the price and MACD peaks. If the price makes a new higher peak while the MACD makes a new lower peak, it is a negative divergence.
See more: OKX: open an OKX account – Reputable crypto exchange
Identify trading strategies based on the MACD indicator
Based on how the MACD indicator works, we can determine a number of trading strategies.
Trading strategy based on MACD and signal line crossover
- Short-term trading strategy:
- Buy when the MACD line crosses above the signal line and sell when the MACD line crosses below the signal line.
- Applicable in short time frames like 1 hour or 4 hours.
- Long-term trading strategy:
- Buy when the MACD line crosses above the signal line and hold the order until a sell signal appears.
- Applicable in long time frames like days or weeks.
Trading Strategy Based on MACD Divergence
- Positive Divergence:
- But when you see a positive divergence between price and MACD, expect the price to rise.
- Identify lower lows of price and higher lows of MACD.
- Negative Divergence:
- Sell or enter a sell order when you see a negative divergence between price and MACD, expecting the price to fall.
- Identify higher peaks of price and lower peaks of MACD.
Combine MACD with a few other technical indicators to increase signal reliability
- Combined with RSI (Relative Strength Index):
- Identify overbought or oversold zones to increase the accuracy of MACD signals.
- For example, when the MACD indicator gives a buy signal and the RSI is in the oversold zone, the buy signal will be stronger.
- Combined with Bollinger Bands:
- Use Bollinger Bands to identify support and resistance levels along with signals from MACD.
- For example, when MACD gives a buy signal and the price is touching the lower band of Bollinger Bands, the probability of a price increase is higher.
- Combined with other moving averages:
- Use other MA lines like SMA (Simple Moving Average) to confirm signals from MACD.
- For example, when the MACD gives a buy signal and the price is above the 50-day SMA, the buy signal will be more reliable.
Epilogue
MACD indicator plays an important role in helping investors identify market price trends. By monitoring the MACD line and the signal line, investors can predict future price trends as well as determine the right time to place orders. Hopefully, the above information from Crypto Trading will help readers better understand MACD and how to use it effectively. If the article is useful, please help Crypto Trading share it with those who need it!
Frequently Asked Questions
What is MACD indicator ?
MACD is a popular technical indicator used to measure the strength, direction, and duration of price trends.
How to calculate MACD line
The MACD line is calculated using the formula:
- MACD line is calculated = EMA (12) – EMA (26)
MACD indicator bullish/bearish signal?
- When the MACD line crosses above the signal line, it is considered a bullish signal.
- When the MACD line crosses below the signal line, it is considered a bearish signal.
- A stronger bullish signal occurs when the MACD line is far below the zero line.
