From the LBank blog.
As a crypto trader, it’s important to constantly explore different ways to gain a complete insight into the market. There are several technical indicators that will be of great help as a set of compasses ready to give you an answer even in the most stormy market conditions. There are Bollinger bands, Fibonacci levels, RSI, and Moving Averages, among others. These indicators are formulas used in determining the state of the markets at different times. These indicators essentially give you relevant indications on the best possible market entry and exits. This guide will focus on MACD and explain how it works for the crypto markets.
MACD is one of the most widely used technical indicators, and it stands for Moving Average Convergence Divergence. Moving average convergence/divergence (MACD) is a trend and momentum indicator that reflects the relationship between two exponential moving averages (EMAs) of an asset’s price.
The MACD plots the difference between a 26-day exponential moving average and a 12-day exponential moving average. Along with these two lines, there is also the plot of a 9-day moving average that is used as a trigger line. This means that when the MACD crosses below this trigger line, it is a signal that prompts you to sell, and when the MACD crosses above the line, it’s a buying signal.
We can also see the MACD indicator as this; If the MACD turns positive, if it makes higher lows consistently during a period of time, this could be a strong buying signal. Conversely, if the MACD makes lower highs, this could be a strong sell signal.
- The MACD line
- Signal line
- Zero line
Let’s explore how you can spot potential buy and sell MACD signals.
This is the most basic signal traders can employ in their crypto trading journey. The MACD line is determined by deducting the 26-EMA from the 12-EMA. EMAs are used over regular moving averages to improve sensitivity to price momentum and trend changes.
The signal line is, by default, a 9-period Exponential MA. When used with the MACD line, the convergence, divergence, and crossing of the two lines are the fundamentals of multiple trading signals.
This is a more sophisticated trading strategy, much less known but a profitable one. This method implies that when the MACD main reaches the level of zero and bounces in the opposite direction, it is a signal of continuation of the trend. This pattern occurs when the two EMAs are getting close to each other and then retrace in the opposite direction.
The strength of this trading method is derived from the simple fact that this is not a simple trend-following method but a contrarian method that attempts to identify market retracements and join the trend in high-precision points. This ensures that the trades’ risk is minimal and the reward is unlimited — you can join a strong trend and ride big profits.
This is made up of small perpendicular lines which look like valleys and mountains. They can be seen either below or above the zero line.
Crypto traders often use MACD divergence signals with other indicators to determine when a strong trading position has been established.
Also, often use the indicator with the Relative Strength Index (RSI) to improve reliability and filter false signals. If used alone, the indicator is not 100% reliable, and the investor is more likely to make costly mistakes.
The MACD indicator reflects the trend, and it’s widely used by crypto traders to determine an asset’s momentum. However, it’s important to note that no indicator is 100% reliable, and this indicator is no exception to the rule. Crypto traders must learn to hold their position until an optimal trade situation is presented. Also, traders should combine and employ risk management to minimize losses and protect their portfolios.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
This article came directly from the LBank blog, found on https://medium.com/lbank/understanding-how-macd-indicator-works-8c0fbf3ed92a?source=rss—-69b5b1a654b1—4