Moving Average Convergence Divergence, also known as MACD, is a trend-following momentum indicator widely used by traders. Although the MACD is a hanging indicator, it can be very useful in identifying possible trend changes.
BTC/USDT daily chart. Source: TradingView
MACD is hovering above and below the zero line, also known as the midline. The shorter moving average is subtracted from the longer moving average to get the MACD value. The signal line, which is the exponential moving average of the MACD, completes the indicator.
The blue line is the MACD and the red line is the signal line. When the blue line crosses the red line, this is a buy signal, and when the blue line goes below the red line, it is a sell signal. Crossing the center line is also a buy signal.
Let’s see how to use the indicator to improve entry and exit from different situations. Next, we will look at how to analyze the MACD on pullbacks and in an uptrend. Finally, we will take a quick look at the significance of the deviations on the MACD.
Adapt the indicator to the fluctuations of the cryptocurrency market
Compared to the older markets, cryptocurrencies are making great strides in a short period of time. Hence, entries and exits need to be quick in order to get the most speed, but without a lot of quick trades.
When a new uptrend starts, it usually lasts for weeks or months. However, each axillary stage has its own corrections. Traders should strive to keep up with the trend and not stop at every minor pullback along the way.
The goal should be to enter the position early when a new uptrend starts and to stay in the position until a trend reversal signal is received. However, this is easier said than done. If the indicator gives too many signals, there will be more unwanted trades, which will lead to higher commissions and will lead to emotional drain.
On the other hand, if the time frame is chosen to give fewer signals, then most of the trend may be missed because the indicator will be slow to spot reversals.
This problem was solved by MACD creator Gerald Appel in his book “Technical Analysis: Tools for Active Investors”.
Appel highlights how the two MACD indicators are used during strong trends, when the most sensitive to entries and least sensitive to weekends are used.
On the topic: Not sure to buy a dip? This important trading indicator makes it easy
Are two MACDs better than one?
The default value used for the MACD indicator in most charting software is a combination of 12 to 26 days. However, for the following examples, let’s use MACD with a 19-39 day combination, which is less sensitive and will be used to generate sell signals. The other will be more sensitive when using the 6- to 19-day MACD combination which will be used for buy signals.
BTC/USDT daily chart. Source: TradingView
Bitcoin (BTC) traded in a small territory in September 2020, during which time both MACD indicators were mostly unchanged. In October, when the BTC/USDT pair started an uptrend, the MACD gave a buy signal when the indicator crossed the middle line in mid-October 2020.
After entering the trade, watch how the MACD approached the signal line four times (marked by ovals on the chart) on the sensitive 6-19 day MACD structure. This could lead to an early exit, leaving most of the gains on the table where the trend has just started.
On the other hand, note how the less sensitive composition from 19 to 39 days remained unchanged during the uprising. This could have made it easier for the trader to stay in the trade until the MACD drops below the signal line on November 26, 2020, triggering a sell signal.
BNB/USDT daily chart. Source: TradingView
In another example, Binance Coin (BNB) crossed the midline on July 7, 2020, triggering a buy signal. However, the sensitive MACD quickly dropped below the signal line on July 6 as the BNB/USDT pair entered a slight correction.
In comparison, the less sensitive MACD remained above the signal line until August 12, 2020, capturing most of the trend.
LTC/USDT daily chart. Source: TradingView
Traders who find it difficult to track the MACD indicators can also use the standard 12-26 day combination. Litecoin (LTC) price from $75 to $413.49 generated five buy and sell signals. All trades produced good entry signals (marked with ellipses) and exit signals (marked with arrows).