Indicating Trades with the MACD — Technical Analysis

May 27, 2019

What is the MACD?

The condition of the cryptocurrency market is best defined as volatile. This is good news when investing little in hopes of a high return. Volatility is not just the action of a live market; it’s the extreme action of prices from one spectrum to another. Traders can collect money in a slow, gradual manner with a still market. Volatile markets allow traders to instead collect gains in large swoops.

There’s only one thing to consider. Huge changes in volatility can work against you. Here’s where the MACD comes in. This indicator gives traders a better glimpse of market conditions as they occur. With large, volatile swings, it’s easy to believe that crypto-prices are headed in one direction when they’re really doing the opposite.

If you’re unfamiliar with Technical Analysis we wrote an in-depth article about how Technical Analysis can Enhance Your Crypto Trading.

The MACD provides additional data on price moves that you can’t read by looking at price alone. Let’s take a better look at what it is:

- Moving Average Convergence/Divergence: Convergence and divergence is key to understanding how the MACD works. Each helps you to better determine how far away or into the major trend prices are. Prices that move away from the data of the MACD show a potential to rapidly change. Here, the data between price and the MACD will conflict. This is called divergence.

Convergence instead occurs when the two data points are in sync. Having them behave in unison could be the data you need to support the research and analysis you’ve done. The MACD tells you how far or close prices are moving in relationship to the major trend. This way, you don’t blindly jump into price moves.

- Indicator Lines: 12 and 26-Day EMA: The Moving Average Convergence/Divergence uses moving averages to plot out a visual display. The basic settings are a 12 and 26-day exponential moving average. These are smoothed-out prices based on the past 12 and 26-days of the MACD. The reason two is used is that you can then compare different time periods for your strategy.

The lesser period is more sensitive than the longer period. The two allow you to look at a broad spectrum of cryptocurrency data and not just what’s occurring now. This is important because price moves can be misleading, and you don’t want to act prematurely.

- Signal Line: Average Data of the 9-Day MACD: The signal line is the most sensitive of the data points. This 9-day average closely follows the current price at any given moment.

- Histogram: Histograms show a plot of continuous bars as related to each other. The histogram of the MACD is built right into the indicator where the 12 and 26-day EMA move above and below. This histogram is plotted as the 9-day moving average in order to create sensitive spikes that peak or dip with extremes in relation to prices.

Why is the MACD Helpful?

The MACD establishes your support and resistance strategy for current price moves. With it, a trader sees the boundaries that exist while trading. The end result is a quieter market that won’t mislead you into false trades. You can also confirm your research by using the MACD.

- Supporting Data: Every trader has a hunch when looking at data and doing their research. It’s not enough to feel good about a trade. Thinking logically and backing your work with real data is key to keeping a mental composure. A MACD collects current, past and potential price moves for this reason.

- Confirmations: Confirmations occur when you’ve done your research. Your work may be supported by logic, but as they say, the devil is in the details. The MACD helps you to second guess even when you’re confident. It only takes one split second to make a big mistake. Confirming your trades, to give yourself the benefit of a doubt that you’re right, is how the MACD is used.

Timeframes and Charts

Though this indicator is set by default, you don’t have to settle for any specific timeframe. Take into consideration your knowledge, experience and trading style. Use those to set the MACD at time periods you find most effective for the way you move in and out of trades.

- Periods and Settings: Periods are the settings of days, weeks and months. These settings are adjustable for both the MACD and price charts. Whether you use bar charts, candlesticks or Heiken-Ashi, the MACD can be adjusted to fit the timeframes you set. Making this indicator work for you is about finding the time periods that give the most data.

Buy and Sell Indicators

Taking the Moving Average Divergence/Convergence further is about setting it up for buy and sell signals. No trader should rely on one indicator alone. Using the MACD in conjunction with others could bring in major gains.

Here’s a better look at what’s involved:

- Slow Progressions: Some of the best indications are no indications at all. Seeing the MACD remaining steady could be the indication that your research and analysis are correct. A steady change between the 9, 12 and 26-day moving averages mean that the market is stable. The slow and steady change from higher and lower prices offer a strong market to enter. These triggers show you when it’s safe to enter the market and when you have the best chance of steady performance.

- Above or Below?: The midpoint, established by the 9-day histogram of the MACD, acts as a benchmark for the strongest price data at any given time. When the 12 or 26-day moving averages are found below the histogram, they could trigger your buy and sell. Many traders look at the “below crossing” as a sell signal, but watch carefully. Some traders find lower prices as a time to buy. You’ll want to watch for how fast prices dip and for how long. The same is true when prices, as seen through the 12 and 26 EMAs, rise above the histogram. Many traders find this as a buy signal. When prices are higher than the histogram, it could mean a strong rally, so watch for how long and how sudden these moves are.

- Fundamental Analysis: Rapid changes in the market differ from common, steady price changes. Rapid changes take into account massive moves that few traders can cause alone. The way to determine the nature of rapid, sudden moves is to tune into your favorite news-outlet for cryptocurrencies. As alluring as it might be to enter these rapid price moves, it helps to gather some fundamental analysis before taking a strong position. You want to be in position prior to the move happening. If you’re caught off guard, it could be that you’re too late.

Applying the MACD to Cryptocurrencies

Using the MACD in cryptocurrencies works when you think in pairs. The rules that apply to an upward trend also apply to a downward trend for crypto-pairs. A single asset, however, loses value as prices fall. With a crypto-pair, one of the coins is gaining value as prices fall.

For this reason, it helps to color code your charts and set which direction is a buy signal in your trading style. Consider all timeframes as you use the MACD, and try not to get caught up in solely one time period. Crossovers tell you that basic trends are changing or that they’re reaching a changing point.

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