How to Use MACD indicator effectively

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What Is MACD?, Moving Average Convergence Divergence – or MACD for short – is a popular technical momentum indicator, and is calculated to show the relationship between two moving averages of the price of a cryptocurrency. By using this indicator, you can also identify trends in the cryptocurrency world, even before they occur. It’s just that, of course, you also need to know how to read the MACD indicator first to be able to use it.

In fact, the MACD indicator is not only used in the cryptocurrency world. The reason is, this technique is also used by investors and traders in various types of other market instruments. For example stocks and forex. And taking into account the volatile nature of the cryptocurrency industry, the use of MACD is actually a natural thing to do, because cryptocurrencies are also included in the category of tradeable assets.

MACD is calculated using a variety of exponential moving averages (EMA). EMA itself is a type of moving average that emphasizes the importance of recent data points. In addition, the EMA is also referred to as the exponentially weighted moving average, which reacts more significantly to recent asset price changes than the simple weighted average (SMA). This is because SMA emphasizes the same weight in all observed periods.

Moving Average Convergence Divergence (MACD) Definition

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The indicators used in the cryptocurrency market vary, of course. That is, MACD is definitely not the only momentum indicator you can use to make a decision. However, MACD does have various advantages that make it very superior and reliable, so it’s no wonder that many traders use MACD as a tool. What’s more, you can actually also use MACD together with other indicators that you think are equally reliable. For example, the volume indicator, Relative Strength Index (RSI), and the stochastic oscillator.

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One of the advantages of MACD is that it uses both momentum and trend aspects in one indicator. Therefore, as a trend indicator, the MACD calculation result will not be wrong in the long term. The use of moving averages ensures that the MACD indicator will slowly follow the movement of the asset in question.

As a momentum indicator, MACD has the ability to predict the movement of your intended cryptocurrency. Divergences (divergences) in MACD can be an important key in predicting trend changes – Negative divergences indicate that bullish momentum is fading, and there could be a potential for a trend change from bullish to bearish. It can be a warning to traders to reap profits in long positions or a signal for aggressive traders to consider short positions.

MACD implementation can also be done on the daily, weekly, and monthly tables. MACD itself represents the convergence and divergence of two moving rates, which will be explained in the next subtopic of the MACD indicator. The default setting for MACD is the difference between 9, 12, or 26 periods EMA. However, any combination of moving averages can be used, which you can then adjust for each of the assets you wish to observe. With this level of flexibility, you can freely adjust MACD based on your preferences, goals, and risk tolerance level.

When summarized, the advantages or disadvantages of MACD as a momentum indicator are as follows:

  • MACD is a simple trading indicator, but it can provide reliable signals. Therefore, the MACD indicator is very easy for you to learn, even if you are still a beginner and are still learning to trade cryptocurrencies and other assets. In addition, this indicator is also very easy to use and read.
  • MACD provides signals related to trend strength. The reason is, with MACD, you can observe whether the trend of the asset you are trading is moving towards a downtrend or an uptrend, which of course can sharpen your market analysis.
  • MACD also has the ability to determine trend reversals; that way, the trader can also identify potential entry and exit points.
  • MACD provides more up-to-date information, especially in comparison to moving average indicators.

MACD Indicator Explained

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As its name indicates, MACD deals with the convergence as well as the divergence of the two moving averages of the cryptocurrency you are observing. Broadly speaking, here is an explanation for convergence and divergence.

Convergence

Convergence or convergence occurs when the averages move closer to each other.

Divergence

Divergence or divergence occurs when the averages move away from each other.

Divergence Analysis Method

Divergences are formed when two moving averages of the cryptocurrencies you are trading move away from each other. Meanwhile, a bullish divergence was formed when assets recorded lower lows, while MACD recorded higher lows. Lower lows in asset trading indicate a downtrend, while higher lows on MACD indicate less downside momentum. This is because, despite the decline, downside momentum still outperforms upside momentum as long as MACD remains in the negative area. If downside momentum appears to be slowing down, this method can sometimes predict a trend reversal or a significant rally.

Then, a bearish divergence is formed when the asset records a higher high, while the MACD line records a lower high. In an uptrend, this higher high is actually a very common thing. However, the lower high shown by MACD actually shows less upside momentum. Thus, even though the upside momentum may be less (less upside), the upside momentum still outperforms the downside momentum as long as MACD remains in the positive area. By slowing downward momentum, it can sometimes predict a trend reversal or a significant decline.

When you observe cryptocurrency price movements, you will certainly see a lot of lines in the table and various other indicators. This actually makes divergence a common sight, where when one price point moves in one direction, other indicators will move in the opposite direction.

For amateurs or beginners whose eyes have not been trained, divergence movements can be thought of as something trivial. It’s just a different story to experienced and expert traders. The reason is, divergence is one of the signs to watch out for because this divergence can be a key trading signal to support market analysis.

In observing divergence movements towards prices, traders generally use 2 (two) types of indicators, namely the Relative Strength Index (RSI) and the On-Balance-Volume (OBV). And furthermore, there are 4 (four) types of divergences anticipated: two types indicate bullish, while the other two indicate bearish.

Bullish divergence signal.

For bullish divergence signals, you will need to watch the lows. The reason is, bullish divergence was found when cryptocurrency prices recorded a lower low, while the MACD indicator recorded a higher low, as mentioned above.

In addition, there is also what is called a hidden bullish divergence, which is observed when cryptocurrency prices record higher lows, while the MACD indicator shows a lower low.

Bearish divergence signal.

Meanwhile, a bearish divergence is the opposite of bullish divergence. That is, to observe this signal, you need to pay attention to the high. This is because the bearish divergence is seen only when the cryptocurrency price shows a higher high, but the MACD indicator shows a lower high.

In addition, there is also a hidden bearish divergence, which was found when the price recorded a lower high, with the MACD indicator recording a higher high.

Divergences need to be addressed carefully. Bearish divergence is common in strong uptrends, while bullish divergence occurs during significant downtrends. The reason is, uptrends often start with strong progress, resulting in a “flood” of upside momentum. Now, even though the uptrend continues, the continuation is taking place at a slow pace, so the MACD drops from its high. Even though the upside momentum is not strong, this trend will continue to outperform downside momentum as long as the MACD line is above zero. Meanwhile, in the beginning of a downtrend, the opposite is the case.

MACD Indicator Components

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Because MACD is a trend momentum indicator that uses moving averages, basically the component used in this indicator is the moving average, aka Moving Average (MA). It’s just that, the question is what kind of moving average do you use? Moreover, as you already know, there are 3 types of moving averages as mentioned above, namely SMA, EMA, and WMA.

MACD itself can actually use all types of moving averages. It’s just that, what is used as a standard is EMA. Meanwhile, MACD has 3 (three) main components. The following is a list and an explanation.

MACD

The first component in this indicator is MACD. In the table, you can set your own color for this MACD component according to your tastes and needs. Well, the value of MACD is obtained from the difference between short period EMA (12) and long period EMA (26). It’s just that, as mentioned earlier, the numbers for these periods – 12 and 26 – are the standard periods used, and you can still adjust them according to your own needs. Now, for this standard value, it means that MACD is obtained from (EMA 12 – EMA 26).

Signal

Then, there are signal components that are included in the MACD indicator. Of course, it’s up to you to set what color you want to use to indicate the signal line. Well, the signal as a component of the MACD indicator also uses EMA. However, there are differences that you need to know – the EMA used for signal components is usually a shorter period EMA than the short period EMA on MACD. For example, for MACD short period EMA is EMA (12), meaning that the EMA used for signals is EMA (9).

Histogram

The third component in the MACD indicator is a histogram. The value itself is obtained from the difference between MACD and signal, or (MACD – Signal).

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When To Use And How To Read The MACD Indicator

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In reading the MACD indicator, there are several ways you can know, understand, and follow. Broadly speaking, there are 3 (three) ways you can read the MACD indicator. The following is an explanation for all three.

MACD crosses signal.

This one method is the most common way used by traders in reading the MACD indicator. One of the reasons is because the way to read it is very easy and simple. When the MACD line crosses and is above the signal line, 2 (two) conclusions can be drawn, namely:

  • The first conclusion ­čí¬ If the MACD line crosses the Signal line and is above it, the chart shows a prediction that the price will increase.
  • The second conclusion ­čí¬ If the MACD line crosses the Signal line and is above the signal line, it can be a sign or buy signal (buy point). Meanwhile, if the MACD line crosses and falls below the Signal line, it means that the price will decline and you can use it as a sell signal (sell point).

The MAC line crosses the value 0.

Usually, if the MACD value crosses above the 0 points, it indicates that there is a strong bullish trend momentum. This means that asset prices will increase, and it can be said that there is an uptrend momentum here. It’s just that, if the MACD value is below point 0, it could actually signal a strong bearish momentum. If you find this, it means that the asset price will decline, and you can say that there is a downtrend momentum.

If the MACD line shows an upward movement but is still below the 0 points, it means that the asset price will increase, but you cannot say it is bullish. The reason is, there is still a possibility that prices will decline again. It’s a different story if the MACD line has successfully crossed and is even above point 0 – this is a signal or indication that indicates an uptrend or strong bullish momentum.

The same is true if the MACD line shows a downward movement. If the MACD day is still above point 0, you may not necessarily conclude that it is bearish even though the price will decline. This is because there is still a possibility that prices will rise again. Meanwhile, if the MACD line shows a downward movement and even crosses and is below 0, it means that there is downtrend momentum.

MACD histogram

Meanwhile, MACD histogram is generally used only to predict asset price movements. If the Histogram line is below 0, then decreases and goes above 0, it means that there is a possibility that the price will increase. Meanwhile, if the Histogram line is above 0, then it moves downward, which means that there is a possibility that the asset price will decline. Therefore, when you use this MACD indicator component, you also need to combine it with the MACD line component.

Conclusion

In the end, the MACD indicator is a trend momentum indicator that traders must learn and know in various types of market instruments, including cryptocurrencies. The reason is, this indicator is not only easy to learn, use and read, but is also able to provide a fairly reliable signal – even in spite of the shortcomings of the lagging MACD indicator. However, the results of the analysis are quite reliable and accurate.

Therefore, even those of you who are beginners are highly recommended to learn and understand this MACD indicator. That way, your trading decisions – both buying and selling – are based on good analysis.

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