The converging divergence of the moving average, also called MACD, is an indicator of momentum following a trend that is widely used by traders. Although MACD is an indicator of delay, it can be very useful in identifying possible trend changes.
The MACD oscillates above and below the zero line, also known as the centerline. The shorter moving average is subtracted from the longer moving average to arrive at the MACD value. The signal line, which is the exponential moving average of the MACD, complements the indicator.
The blue line is the MACD and the red line is the signal line. When the blue line crosses the red line, it is a buy signal, and when the blue line falls below the red line, it is a sales trigger. The cross above the central axis is also a buying signal.
Let’s look at how to use the indicator for better inputs and outputs from different positions. We then examine how the MACD is analyzed during backtracks and in the uptrend. Finally, we take a brief look at the importance of divergences on MACD.
Adjustment of the indicator to crypto market volatility
Compared to older markets, cryptocurrencies are witnessing large movements in a short time. Entrances and exits should therefore be fast to capture much of the movement, but without too many whipsaw shops.
When a new uptrend begins, it usually stays in effect for weeks or months. However, each bull phase has its share of corrections. Traders should try to stay on top of the trend and not be stopped by every small return along the way.
The goal should be to enter the position as soon as the new uptrend begins and stay with the position until a trend reversal is signaled. But that’s easier said than done. If the indicator gives too many signals, there will be several unwanted trades that will cause large commissions and emotionally deplete.
On the other hand, if the time frames are chosen to provide fewer signals, much of the trend could be missing because the indicator will be slow in identifying reversals.
MACD creator Gerald Appel addressed this issue in his book Technical Analysis: Power Tools for Active Investors.
Appel emphasizes how two MACD indicators can be used during strong trends, using the more sensitive one for inputs and the less sensitive one for exits.
Are two MACDs better than one?
The default value used for the MACD indicator in most mapping programs is a combination of 12 to 26 days. However, in the following examples, we will use one MACD with a 19- to 39-day combination that is less sensitive and will be used to generate sales signals. The second will be more sensitive and will use a 6- to 19-day MACD combination that will be used to purchase signals.
Bitcoin (BTC) was traded in a small range in September 2020 and during this period both MACD indicators were largely the same. In October, when the BTC / USDT pair started an upward trend, the MACD issued a buy signal when the indicator crossed the midline in mid-October 2020.
After entering the store, watch the MACD approach the signal line four times (marked as ellipses in the graph) with a sensitive 6- to 19-day MACD combination. This could result in early departure, so much of the profits remained on the table as the uptrend was just beginning.
On the other hand, notice how the less sensitive 19-39-day combination remained stable during the uptrend. This could make it easier for the trader to stay in the store until the MACD falls below the signal line on 26 November 2020 and triggers a signal to sell.
In another example, Binance Coin (BNB) crossed the center line on 7 July 2020 and triggered a buy signal. However, the sensitive MACD turned down quickly on July 6 and sank below the signal line as the BNB / USDT pair entered a minor correction.
The relatively less sensitive MACD remained above the signal line until 12 August 2020, which captured most of the trend.
Traders who find it difficult to monitor the two MACDs can also use the default combination of 12 to 26 days. Litecoins (LTC) The journey from approximately $ 75 to $ 413.49 generated five buy and sell signals. All trades generated good input (marked as ellipses) and output (marked by arrows) signals.
How MACD can signal corrections
Merchants can also use the MACD to purchase appeals. During uptrend corrections, the MACD on the signal line decreases, but as the price continues, the MACD from the signal line is preferred. This formation, which looks similar to a hook, can provide a good entry opportunity.
In the example of Cardano above (HERE IS) crossed the center line on 8 January 2020 and signaled a purchase. However, as the upward movement stopped, the MACD fell near the signal line on January 26, 2020, but did not break below it. As the price recovered, the MACD broke away from the signal line and resumed its movement higher.
This provided an opportunity for traders who may have missed buying a cross above the center line. The sell signal was generated on February 16, just as the ADA / USDT pair began a deep correction.
MACD divergences can also signal a change in trend
The price of bitcoin between 21 February 2021 and 14 April continued at higher highs, but the MACD indicator reached lower highs during this period and created a bearish divergence. It was a sign that momentum was weakening.
Traders should be careful when creating a bearish divergence, and avoid long trades during such a period. The long bearish divergence in this case culminated in a massive decline.
Litecoin shows how MACD created a strong divergence during the strong downtrend from July to December 2019. Traders who bought a crossover over the centerline could be in September again and again in November.
This shows that traders should wait until the price action shows signs of a change in its trend before negotiating a divergence in MACD.
Several important food stalls
The MACD indicator captures a trend and can also be used to measure the momentum of an asset. Depending on market conditions and the asset being analyzed, traders may change the MACD period setting. If the coin is a fast draw, a more sensitive MACD can be used. For slow motion, the default setting or less sensitive MACD can be used. Traders can also use a combination of a less sensitive and a more sensitive MACD indicator for better results.
However, there is no perfect indicator that still works. Even with the above permutations and combinations, trades will move in the opposite direction than expected.
Traders should implement money management principles to quickly reduce losses and protect paper profits when trading moves as expected.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and business move involves risk, you should do your own research when making a decision.