Moving Average Convergence Divergence (MACD) is an oscillator-type indicator widely used by traders in technical analysis (TA). MACD is a trend tracking tool that uses moving averages to determine the momentum of a stock, cryptocurrency, or other tradable asset.
Developed by Gerald Appel in the late 1970s, the Moving Average Convergence Divergence indicator tracks pricing events that have already occurred, so it is classified as a lagging indicator. signals based on pricing action or price data that has occurred in the past). The MACD indicator can be useful for gauging market momentum and possible price trends, and many traders use it to spot potential market entries and exits.
Before going into the analysis of the mechanics of MACD, it is important to understand the concept of moving averages. A moving average (MA) is simply a line that represents the average value of previous data over a predetermined period of time. In the financial markets, moving averages are one of the most commonly used indicators in technical analysis (TA), and they can be divided into two different types: simple moving averages (SMA) and exponential moving average (EMA). While SMA weighs all data inputs equally, EMA considers the most recent data values (newer price points) to have higher importance.
How MACD works
A MACD indicator can be created by taking the difference of two exponential moving averages (ECA) to create a main line (MACD line), then using this line to calculate another EMA that represents the signal line.
In addition, there is also the MACD histogram, which is calculated based on the difference between these two lines. The chart, along with the other two lines, oscillates above and below the center line - also known as the zero line.
Therefore, the MACD indicator consists of three elements that move around the zero line:
MACD line: helps determine upward or downward momentum (market trend). Calculate this line by calculating the difference of two exponential moving averages (EMA).
Signal line: an EMA of the MACD line (usually a 9-period EMA). Using a combination of signal line analysis and MACD lines can help spot potential reversal points or market entry and exit points.
Histogram: graphical representation of the divergence and convergence of the MACD line and the signal line. In other words, the chart is calculated based on the difference between the two lines.
MACD line
In general, exponential moving averages are measured against the closing price of an asset, and the periods used to calculate the two EMAs are usually set as 12 periods (faster) and 26 periods (slower). . The period can be configured in different ways (minutes, hours, days, weeks, months), but this article will focus on daily settings. However, the MACD indicator can be customized to suit different trading strategies.
Assuming standard time, the MACD line is calculated by subtracting the 26-day EMA from the 12-day EMA.
MACD line = 12-day EMA - 26-day EMAAs mentioned, the MACD line oscillates above and below the zero line and this is what signals a centerline crossover, letting traders know when the 12-day EMA and 26-day EMA change positions relative to each other. their opposite.
Signal line
By default, the signal line is calculated from the main line's 9-day EMA, so it helps users better understand its previous movements.
Signal line = 9-day EMA of MACD lineAlthough it is not always possible to determine the exact point of intersection between the MACD line and the signal line, these events are often considered reversal signals, especially when they occur at the extremes. value of the MACD histogram (above or below, away from the zero line).
MACD chart
The histogram is a visual record of the relative movements of the MACD line and the signal line. It is calculated simply by finding the difference of these two lines:
MACD histogram = MACD line - signal lineHowever, instead of adding a third line of movement, the chart is made up of columns, making it easier to read and understand. Note that the columns of the chart have nothing to do with the trading volume of the asset.
MACD settings
As discussed, the default settings for MACD are based on 12, 26 and 9 period EMAs – represented as MACD(12,26,9). However, some technical analysts and chartists vary the periods as a way to create more sensitive indicators. For example, MACD (5,35,5) is an indicator commonly used in traditional financial markets in conjunction with longer time frames, such as weekly or monthly charts.
It is worth noting that due to the high volatility of the cryptocurrency market, increasing the sensitivity of the MACD indicator can be risky as it will likely lead to many false signals and information.
How to read MACD charts
As can be seen from the name of the indicator, the Moving Average Convergence Divergence indicator tracks the relationship between moving averages, and the correlation between the two can be described as either converging or diverging. Convergent when the lines point toward each other and diverge when they move apart.
However, the relevant signals of the MACD indicator are related to so-called crossovers, which occur when the MACD line crosses above or below the centerline (centerline crossover), or crosses above or below the signal line (interference with the signal line).
Remember that centerline crossovers and signal line crossovers can occur multiple times, creating many false signals and causing confusion - especially in relation to volatile assets, such as cryptocurrency. Therefore, one should not rely solely on the MACD indicator alone.
Interferes with the center line
Centerline crossover occurs when the MACD line moves above the positive or negative zone. When it crosses above the centerline, a positive MACD value indicates that the 12-day EMA is greater than the 26-day EMA. Conversely, a negative MACD value is displayed when the MACD line crosses below the centerline, meaning the 26-day average is above the 12-day average. In other words, a positive MACD line indicates stronger bullish momentum, while a negative indicator may indicate a bearish outlook.
Interference with signal lines
When the MACD line crosses above the signal line, traders often interpret it as a potential buying opportunity (entry point). On the other hand, when the MACD line crosses below the signal line, traders tend to see it as an opportunity (exit point).
Although signal interferences can be useful, they are not always reliable. It is worth considering where in the chart they occur as a way to minimize risk. For example, if a crossover signals buying but the MACD is below the centerline (negative), market conditions can still be considered bearish. Conversely, if the signal line crossover appears to indicate a potential selling point, but the MACD line is positive (above the zero line), market conditions are still likely to be bullish. In such a case, following the sell signal may carry more risk (in the overall trend).
MACD and price divergence
Along with centerline and signal line crossovers, the MACD histogram can also provide information through divergences between the MACD histogram and the asset's price action.
For example, if the peak that the cryptocurrency's price action makes is higher than the peak for the MACD makes, we will have a bearish divergence, showing that although the price is rising, the price momentum (buying pressure) is increasing. not as strong as before. Bearish divergences are often interpreted as selling opportunities because they tend to appear before price reversals.
Conversely, if the MACD line creates two lows that line up with the two lows of the asset price, this is considered a bullish divergence, indicating that despite the price falling, buying pressure is stronger. Bearish divergences tend to appear before price reversals, potentially indicating a short-term bottom (from a downtrend to an uptrend).
Conclude
When it comes to technical analysis, the Moving Average Convergence Divergence oscillator is one of the most useful tools available. Not only because it is easy to use, but also because it is effective in determining both market trends and market momentum.
However, like most TA indicators, the MACD indicator is not always accurate and can provide many false and misleading signals - especially in relation to volatile assets or in action Prices are weak or moving sideways. Therefore, many traders use the MACD in combination with other indicators - such as the RSI - to reduce risk and further confirm signals.
