How to Use MACD in Crypto Trading
As a crypto trader, you need a simple way to analyse the market and understand when to buy or sell. There’s no better way to gauge the market price action than a MACD indicator. If the market is ready to move in a particular direction over “X” period, then the MACD will follow that trend.
What is a MACD Indicator?
MACD (Moving Average Convergence and Divergence) is a powerful technical analysis indicator. It’s programmed to help traders identify the current market’s trend and strength, as well as determine reversal points.
Here is a zoomed image of a MACD Indicator:
How does a MACD Indicator Work?
A MACD is made up of a histogram and two exponential moving averages (EMAs). The slower moving average is the MACD line, and the faster one is the signal line. The default settings include 12 EMA, 26 EMA, with a period of 9.
When the two EMAs come together, they are said to be “converging”. On the other hand, when the EMAs start moving away from each other, they are supposed to be “diverging”. The variation between these EMAs reflects in the histogram.
When the MACD trades above the zero line, this is an indication that the market is in an uptrend. In a bearish market, the MACD will trade below the zero line.
That said, if a cryptocurrency is in an uptrend (extending to higher highs and breaking critical levels of resistance), traders may look for opportunities to go long. Conversely, traders may look for opportunities to go short if the market is trending downwards (reaching lower lows and breaking key support levels).
How do You Use MACD Trading Signals?
Now that you have some information on how a MACD indicator works let’s dive deeper. In the subsequent section, we will go through the different signals generated by this indicator, including MACD crossovers, MACD divergence, and overbought/oversold.
The goal here is to help you understand how traders use such signals to come up with profitable trading decisions.
1. MACD Crossovers
The signal line and MACD line crossover can be used in the same way as a stochastic oscillator. The crossover between the two lines generates both sell and buy signals.
Sell signal - We have a sell signal when the MACD line crosses the signal line to the downside. This action creates a bearish signal on the chart, and soon or later, the prices trend lower.
Buy Signal – We have a buy signal when the MACD line crosses the signal line in the upper side. This crossover indicates that the prices action might be entering a bullish move.
The chart above shows a bullish MACD crossover. As you can see, the prices went higher soon after the MACD line crossed the signal line. The red circle highlights the most profitable trade entry point.
2. MACD Divergence
Here we have yet another brilliant signal to help you analyse the market and identify early trend-following trades.
When the MACD direction and the general price action on the chart are in contradiction, this is a hint that soon or later price may change course.
Bearish MACD divergence – A bearish MACD divergence occurs when the price action is increasing, and the MACD is showing lower tops. This divergence is a sign that the market might start a bearish move.
Bullish MACD divergence- On the other hand, a bullish MACD divergence happens when the price action is decreasing, and the MACD line is forming higher bottoms. This divergence is a hint that an uptrend might start.
3. Overbought & Oversold
Traders can also use this indicator to identify overbought and oversold market signals.
Overbought signal - When the MACD line extends extensively in the bullish direction from the signal line, you get an overbought MACD signal. In this case, we anticipate the bulls will be exhausted after a sharp rise, and the bears will take charge.
Oversold signal -We consider the MACD oversold when the MACD line extends a relatively vast bearish distance from the signal line. In such a scenario, traders may wait for the bears to exhaust, and ride on the emerging bullish move.
MACD Trading Strategy: Practical example
Now let’s look at a practical example on how you can use the MACD indicator with price action analysis.
The chart below shows a couple of trade signals that incorporate the MACD lines and histogram.
The first trading signal (far left) appeared after a price retracement. The price action forms an inverted hammer candlestick pattern, and almost immediately, the MACD lines form a bullish crossover. These matching signals are a sufficient confirmation for traders to execute long trades (at the first green circle). Place your stop-loss a few pips just below the bottom created at the point of market reversal (as shown above).
The prices rally firmly upwards, and after the creation of the last high (an optimal exit point for long trades), we see market reversal candlesticks. At the same time, we see the MACD lines cross in a downward direction. This combination is a matching bearish signal that provides an opportunity for traders to short the market.
After a sharp drop, we see the market slow down. At the same time, the MACD slows down and starts to form a bullish divergence (exit short trades). Suddenly, a MACD crossover occurs, and afterwards, we get a bullish hammer. This a potential sign for traders to open long trades again.
To wrap up, the MACD indicator can produce various trading signals and show traders the momentum of a price movement. Nonetheless, just like other technical indicators, the MACD has its flaws. False crossover trade signals can occur due to choppy price action.
In a trending market, most of the signals the MACD generates can be very profitable. However, traders should be careful to validate their trade ideas. For instance, if you see a bullish MACD divergence, an upward MACD cross, and trend reversal candlesticks at the same time; you've found a buy signal much stronger than when you just spot a single signal.
Want to learn more? Here are some other articles you might like:
Learn how to read different candlesticks (Beginners)
What candlestick patterns predict high profits? (More advanced)
About the author:
Jay Jackson is a blockchain enthusiast and a freelance writer at topcryptowriter.com. He works closely with brands (people, businesses and startups) in the crypto sphere. He currently writes Blog posts, Guides, Press releases, ICO reviews, eBooks & Whitepapers. You can find him on LinkedIn.
The above references an opinion and is for informational purposes only. Do not take this as personalised financial or investment advice. The views expressed by the author do not necessarily represent the opinion of BitPrime.
Images courtesy of TradingView users unless stated otherwise.
Last updated: 29/08/2019