MACD (Moving Average Convergence Divergence)

by | Aug 11, 2021 | Blog

Moving Average Convergence Divergence (or MACD) is a trend-following technical analysis indicator which is used to visualise the difference between two moving averages on the price of an asset. This indicator is particularly useful for cryptocurrency trading as it smooths out the momentum of a volatile market. To understand how to use the MACD indicator, it’s important that you first have a good understanding of moving averages and know how to read a candlestick chart.

The MACD Moving Average Lines

The MACD consists of 2 moving average lines called the MACD line and the Signal line and is often coupled with a histogram displayed beneath the chart. The indicator can be used on any timeframe on a candlestick chart but for the purposes of this explanation, we are going to use the daily chart. The MACD line, which is coloured blue on the infographic below is calculated by subtracting the 26 day moving average from the 12 day moving average. For clarification, the hourly MACD would show a pattern calculated by subtracting the 26 hour moving average from the 12 hour moving average. The moving averages used for these calculations are Exponential Moving Averages (EMAs) as opposed to Simple Moving Averages (SMAs). These are moving averages where a greater weight is placed on the most recent prices.

MACD and Signal Lines in Crypto Trading

The signal line, coloured yellow on the infographic above, is a further 9 day EMA of the MACD line which is placed on top. Because the signal line is a moving average of the MACD line, it will paint a smoother pattern on the chart through which the MACD line will oscillate. When the MACD line is above the signal line, traders hypothesize that the asset is overbought. When the MACD line is below the signal line, investors may look at buying in.

The MACD Histogram

How to use the MACD to Trade Bitcoin

The MACD is often characterised by the histogram which is typically displayed below the chart. The bars on this histogram visualise the difference between the MACD line and the signal line without putting any emphasis on the actual price itself. When the histogram bars are green, the MACD line is above the signal line. When the histogram bars are red, the MACD line is below the signal line. The longer the bars are, the greater the distance between the 2 lines. The base line of the MACD’s histogram represents the signal line so the bars will change from red to green (or vice versa) when the MACD line crosses through the signal line.

 

 

How to trade crypto using the MACD Indicator

The MACD is a great way to visualise what has happened in a market but it does have its limitations. Moving averages are intrinsically lazy as their values are based on past prices. The lag in the information displayed can sometimes give false hope that a price reversal is about to happen before a continuation of a trend. Using the MACD alongside another indicator such as a relative strength indicator (RSI) can help to determine the strength of a pattern. The MACD and RSI can sometimes give contradicting signals so comparing them is a good way to avoid catastrophic losses.

In Summary

Using the MACD to determine future price action is more reliable when used in conjunction with other technical analysis methods. Looking for divergence patterns can give a great indication of the strength of a signal and couple that with a bull flag or similar, we could have a very lucrative trading opportunity on our hands.

 

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