By Nathan Ferguson
Over the past several years, the MACD indicator has proven to be a valuable tool for traders who use it to identify whether markets are bullish or bearish. The indicator, however, can be misunderstood due to a number of misconceptions. To help you navigate the markets with the MACD indicator, this article will explain how to do it.
MACD, or moving average concentration divergence, is a popular indicator on the market. By identifying divergences in the MACD, we are able to identify trading opportunities. Learn five ways to gain the most from the MACD. My recent research has been exploring the crossover between technical analysis and cryptocurrency in the last few years. By using the “indicator” in the center of the chart, a technical interpreter can forecast the future price movement.
The importance of technical analysis should be kept in mind, however, as it can only be helpful if one assumes the capability of predicting the future. The nature of businesses, companies, and people is complex, and little data is available to assist in improving our understanding. A limited amount of data is available for the implementation of blockchains and cryptocurrencies.
With any indicator, one can make predictions about the future very easily. Cryptocurrencies experience rapid and large movements in comparison to traditional markets. Therefore, the entry and exit points should be swift to capture most of the movement but refrain from too many whipsaw trades.
MACD is used by traders to identify turning points, facilitate openings on pullbacks, and capture the movement until it reverses. The (MACD) indicator is common among traders and measures trend-following momentum. Despite the MACD’s lagged nature, it can be an extremely useful tool for identifying trend changes.
An oscillating zero line, or centerline, oscillates above and below the MACD. The MACD is calculated by subtracting a shorter moving average from a larger moving average. A signal line containing the MACD average is the final element of the indicator.
MACD is the blue line, while signal is the red line. It indicates a buy signal to cross above the blue line and a sell signal to cross below the red line. Likewise, crossing above the white centerline indicates a buy. This article will give an explanation of how the indicator can be used for better entry and exit points. We’ll learn what the indicator does and how it can be used to make better trades. Later, we will discuss MACD analysis during pullbacks and uptrends. Last but not least, we’ll briefly examine divergences on the MACD.
Crypto market volatility adapted to the indicator
The cryptocurrency market has witnessed big movement within a short period of time compared to a traditional market. The key here is to enter and exit the market in a timely manner so that you are able to catch a part of the movement without making too many whipsaw trades. The onset of a new uptrend normally takes a couple of weeks or months. There are, however, always corrections in bull markets. The best way to stay in the market during minor pullbacks is to stay with the trend and not get spooked by them.
As the new uptrend begins, the position should be entered early and maintained until a trend reversal is confirmed. However, it is not always easy. Several unnecessary trades will occur if the indicator generates too many signals, resulting in large commissions and emotional exhaustion. In contrast, if the time frames are chosen to give fewer signals, this can lead to the indicator missing out on a large part of the trend due to its slowness in detecting reversals.
MACD inventor Gerald Appel addresses this issue in the book Technical Analysis: A Powerful Tool for Active Investors. According to Appel, MACD indicators can be used in strong trending conditions, with the more sensitive indicator for entry and the less sensitive indicator for exit.
What are the advantages of two MACDs?
MACD is typically displayed by most charting software as a combination of 12- to 26-days. Use one MACD with a combination of 19- to 39-days instead to generate sell signals. This combination is less sensitive than the other two and is more suitable for generating sell signals. Using the 6- to 19-day MACD combination as a buy signal, the second indicator will be more sensitive.
A tight range of Bitcoin ( BTC ) price movements with flat MACD indicators characterized September 2020. After the MACD line surpassed the centerline at the beginning of October, the BTC/USDT pair started a trend upward when the MACD line moved above the centerline.
Watch how the MACD signal line came close to reaching the signal line four times during the most sensitive 6- to 19-day MACD combination on the chart (represented by the ellipses). It would have been very foolish to exit before the uptrend started, because the gains would have been significantly diminished if the exit was premature. On the other hand, the combination of 19 to 39 days remained relatively stable during this uptrend. The trader could have easily stayed in the trade when the MACD line crossed below the signal line on November 26, 2020, giving a sell signal.
In addition to generating a buy signal, a cross over of Binance Coin (BNB) on July 7, 2020 also signaled a buy signal. As the BNB/USDT pair started to retrace on July 6, the MACD dipped below the signal line and turned down. The default 12- to 26-day combination can also be used by traders who find it difficult to follow two MACD indicators. There were five buy and sell signals generated by LTC’s journey from $75 to $413.49. A good entrance (marked by ellipses) and way out (marked by arrows) signal resulted from all five trades.
How the MACD can signal corrections
A trader may also buy pullbacks using the MACD. It has been observed that the MACD lines drop to the signal line during corrections within an upward trend, but return to the signal line after the price begins to resume its upward trend. In essence, this formation can provide a good entry point in most situations since it resembles a hook formation.
Using the example above, Cardano moved over the center line on Jan. 8, 2020, indicating a buy signal. As an up-move stalled on Jan. 26, 2020, the MACD fell, but it did not break below the signal line. The MACD broke away from its signal line as the price recovered and returned to its upward trend. It provided traders who missed the opportunity to buy the cross above the centerline a chance to buy. ADA/USDT started a deep correction around the time the sell signal was generated on Feb. 16.
MACD divergences are also indicative of a trend change
During the period between Feb. 21, 2021, and April 14, the price of Bitcoin increased but the MACD indicator reached lower highs, indicating a bearish divergence. Momentum was waning at this point. It is important to avoid long trades during bearish divergences and become cautious when they form. This case ended with a massive fall due to a long bearish divergence. From July to December 2019, Litecoin’s MACD was showing a positive divergence during a severe downtrend. It is possible that traders who purchased the crossover above the centerline were whipsawed in September and later in November. Trading on the MACD divergences is not advisable until price action shows signs of changing trends before acting.
Some important points
An asset’s momentum can also be measured using the MACD indicator. Traders may adjust the MACD cycle settings according to market conditions and the assets being analyzed. A more sensitive MACD can be used if the coin is moving fast. It is recommended to use the default settings or a less sensitive MACD for people with slow movements. A trader can also combine the less sensitive and more sensitive MACD indicators to increase their performance.
The only perfect indicator is one that works all the time. It is still inevitable that the transaction will be contrary to expectations, even with all of the above combinations and permutations. In order to protect book gains and reduce losses quickly, traders should rely on fund management principles.
Please note that all views and opinions expressed here are for personal reasons which should not be considered to represent the views of Cointelegraph.com. The investment and trading decisions you make involve a certain level of risk, and when making your decision, you should look into it on your own.
Indicators such as the MACD can be used to identify trends and measure the dynamics of an asset, which is a useful commodity for traders. It is possible for traders to change the MACD’s time setting based on market conditions and the assets that are being analyzed. You can also try combining the two different MACDs for better results by using the less sensitive MACD and the more sensitive MACD.
No indicator is perfect, so we must keep this in mind. It is possible for a trade to go against expectations even when the parameters above are changed and combined. There are several essential steps that traders should follow when they are engaged in trading. These include implementing capital management, cutting losses quickly, and protecting paper profits.
An indicator such as the MACD is a powerful trend-following tool that can be used to measure asset momentum as well as trend direction. Traders may adjust the MACD period setting with regard to market conditions and the asset they are analyzing.
The MACD may be more sensitive in cases where a currency is moving rapidly. It can be set at the default settings for slowest or use a MACD with a lower sensitivity. In addition to using a combination of a weaker and a stronger MACD indicator, traders can also use a combination of both for better results.
In spite of this, no perfect indicator is going to work every time. Regardless of the above combinations and permutations, there is a big possibility that the market will move in a way that is not as expected. In order to protect paper gains in the event the trade goes as planned, traders should use money management principles to avoid cutting losses quickly.
MACD measures trend and momentum and is able to provide insight into the direction of an asset. Traders might make a change to the period setting of the MACD depending on the current market conditions or the asset being analyzed. An MACD that is more sensitive might be used if a coin has a tendency to move quickly.
It is possible to use a less sensitive MACD for slow movers or a default setting for fast movers. In addition to the use of less sensitive and more sensitive MACD indicators, traders can also combine them in order to achieve better results.
Despite the fact that there is no perfect indicator that works every single time. Even when considering the above permutations and combinations, you will still see moves in the opposite direction as expected. Money management principles should be utilized by traders in order to avoid losses and to protect profits in the event that trades turn out to be profitable. Cointelegraph’s opinions and opinions expressed here are an independent reflection of the author’s own perspectives and are not necessarily reflected in Cointelegraph.com’s. Any investment or trading move entails some level of risk. Prior to making a decision, you should thoroughly research the subject.
Frequently Asked Questions
- Do you know how to use MACD effectively?
Traders are always looking for valuable signals that will help them identify overbought and oversold conditions. One such valuable signal is the Moving Average Convergence Divergence (MACD). In fact, these indicators may be a great way to identify trends, but they are not always effective at pointing out entry or exit points into or out of the market. There are many momentum indicators in the world of Forex, but the MACD has the greatest popularity.
A trend indicator is a tool used by traders to determine the strength of a trend before buying or selling. Despite this, traders need to understand a few key concepts in order to use the MACD effectively. In other words, when the MACD line is rising, it indicates that the trend is getting stronger, while when the MACD line is falling, it indicates that the trend is getting weaker.
- Which MACD setting is most suitable for day trading?
Generally speaking, MACD is considered the best indicator that a trader can use when trading, and it is a very useful tool for deciding when to buy and when to sell stocks in the market. Gerald Appel and Richard Schmalensee developed it towards the end of the 1970s, but it is still in use today. Traders and investors are using the MACD on a daily basis as a relatively popular technical indicator.
In the world of technical analysis, the Dow Jones Industrial Average is regarded as one of the most important indicators because it is used mostly to signal the beginning and end of a trading period. There are even a handful of traders who use it as a trade signal. This indicator is basically two moving averages combined into one simple indicator.
- Is MACD a good indicator?
A well-known trading tool on the market, it is the most familiar of the lot. A common indicator which is abused on the internet, and particularly popular among individual traders who want to earn a quick buck, is the moving average crossover (MACD) indicator. However, is this simply just an oversimplified indicator? The answer is both yes and no. The answer is no, since there are plenty of ways that you can use the indicator that a lot of traders may not be aware of, and in some cases they may end up relying on it instead.
Furthermore, while it is a simple indicator, it also happens to be a remarkably powerful one. This is one of the most widely used trend-following indicators, which show a line indicating the movement of the underlying asset on a chart. A trend indicator is usually used as a way of visualizing an uptrend or downtrend in an asset, but this is not always the case, especially if the trend is upward or downward. A reversal in a trend can sometimes be predicted using this indicator.
Bottom Line
Traders often agree on blind rules, such as not adding to a losing trade, which can be effectively broken to generate extraordinary gains. To violate these important financial rules, one should start with a systematic and logical approach before capturing profits. The MACD histogram offers a new way to trade divergence by relying on the price instead of the indicator. The idea of applying this to FX trading, which allows positions to be increased quickly, is even more appealing today and position traders.