In the world of crypto trading, knowing how to use crypto indicators is crucial for traders. Typically, when a trader identifies a positive trading signal, they rely on a combination of three or four indicators to confirm the signal before entering a trade. This is the standard approach used by professional traders. There are many indicators available, and it is not necessary for a trader to understand all of them. However, there are a few key indicators that traders should be familiar with. One of the most significant ones is certainly Moving Averages Convergence Divergence (MACD). Let’s learn everything that a crypto trader or trading enthusiast should know about this highly useful indicator.
1. MACD: What’s It
MACD, which stands for Moving Average Convergence Divergence, is an oscillator-style trend-following indicator. Its primary role is to assist us in accurately determining the underlying trend of any cryptocurrency we are analysing. Developed by Gerald Appeal in the late 1970s, it is an old but time-tested indicator.
1.1. The Composition of MACD
First, let’s examine the composition of MACD before going deeper into the calculator part of this indicator.
When we launch MACD on a chart in TradingView, it typically appears as follows:
We can observe two primary lines and a histogram. The first and most crucial line is the MACD line, usually displayed in blue. Following closely is the Signal Line. These two lines frequently intersect. Meanwhile, the Histogram is usually positioned above the horizontal line that runs through the zero mark of the oscillator. The MACD and Signal lines tend to move up and down the zero lines on many occasions.
Now, let’s proceed to the calculation part of MACD.
1.2. How MACD is Calculated: Just Simple Way
The mathematics behind MACD is relatively simple and is among the simplest among this category of indicators.
|MACD Line = 12-period Exponential Moving Average (EMA) – 26-period EMA
|Signal Line = 9-period EMA of the MACD line
To put it simply, the MACD line represents the difference between a short-term EMA and a long-term EMA. Typically, we use a 26-period EMA for the longer term and a 12-period EMA for the shorter term. For the Signal Line, we put a 9-period EMA.
2. How to Launch MACD in a Chart in TradingView
Launching MACD in a chart in TradingView is a simple 5-step process.
- Step1: Sign in to TradingView
Log in to your TradingView account or create one if you are new.
Choose a cryptocurrency chart you want to analyse.
- Step 3: Click on the Indicator Button
Locate the “Indicator” button on the chart interface and click it.
- Step 4: Select MACD Option
In this indicators list, find and select “Moving Average Convergence Divergence” from the available options.
- Step 5: Configure MACD settings
If you click the setting icon, a setting window will appear. Adjust the parameters like Fast Length, Slow Length and Signal Smoothing. Better it is to not make any change in the default values, unless you have a specific target to achieve by making changes.
3. What Does The MACD Primary Measures
The three main elements of MACD are MACD Line, Signal Line and Histogram. These three provide three important insights.
- MACD Line:- This line helps us see if the market has upward or downward momentum. When the MACD line is above zero, it suggests upward momentum, and when it is below zero, it suggests downward momentum. The greater the distance from zero, the stronger the momentum.
- Signal Line:- Looking at the Signal Line in combination with the MACD line can give us clues about when the market might be about to change direction. If the MACD line crosses above the Signal Line, it indicates a potential upward trend. On the other hand, if the MACD line crosses below the Signal Line, it suggests a potential downward trend. These crossovers can be early signals of market reversals or shifts in direction.
- Histogram:- This shows the difference between the MACD line and the Signal Line. When the MACD line is above the Signal line, the histogram is positive, indicating a strong upward momentum. When the MACD line is below the Signal line, the histogram is negative, suggesting a strong downward momentum. The histogram also helps us to see when these two lines are moving apart (diverging) or coming closer together (converging).
3.1. What’s MACD Divergence
Divergence is a somewhat advanced concept, which can be valuable to study for those who are keen on exploring this indicator in greater depth.
MACD Divergence occurs when the price of a crypto makes lower lows, but the MACD indicator shows higher lows. This divergence typically signals a potential trend reversal. It suggests that the current trend may be losing momentum, and a reversal in price direction might be on the horizon.
The same is applicable when the price of a crypto reaches higher highs, but the MACD indicator displays lower lows. In this scenario, it suggests a potential trend reversal from an uptrend to a downtrend. This divergence signals that although prices are rising, momentum is weakening.
4. Major Limitations of MACD
No indicator is faultless. MACD too has a few important limitations.
- Lagging Indicator:- MACD reacts to price changes with a delay, making it less effective for timely predictions.
- Whipsaw Signals:- It can generate false signals during sideways markets, causing confusion.
- Limited Analysis Depth:- MACD does not consider other factors like volume or support/resistance levels, limiting its analysis depth.
The Moving Average Convergence Divergence is a well-established trend-following indicator used in cryptocurrency analysis. Comprising the MACD Line, Signal Line, and Histogram, it offers valuable insights into market momentum and potential reversals. MACD’s calculation involves exponential moving averages, making it a simple yet effective tool. However, it has limitations, including lagging reactions to price changes, susceptibility to false signals in sideways markets, and a lack of consideration for factors like volume and support/resistance levels. MACD, when used in conjunction with other tools, gives better insights.