BitStarz’s Trading 101 series open the lid on the world of technical trading and offers guides and tips on the basic tools and indicators you need to get started in trading crypto and other assets. By using our indicators in conjunction with each other, and the many others that are out there, you can define your crypto trading style and begin to make some sense of the crazy crypto markets!
What is the MACD?
Moving Average Convergence Divergence (MACD) is a momentum indicator that shows the relationship between two moving averages of a token’s price. It is a trend-following indicator that is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA, with the resulting line being the MACD line. A 9-day EMA of the MACD, called the “signal line,” is then plotted above the MACD line, which can then act as a trigger for buy and sell signals. When the MACD crosses above its signal line traders usually see this as a signal to sell, or short, as it is indicative of a downward move, while a crossing below can act as the alternative signal.
As we can see above, the MACD crossed bullish on November 16, which preceded a push from $7,500 to $20,000. When BTC topped out the MACD crossed bearish on December 19, just a couple of days after the actual top. This preceded an almost 50% correction, with further bearish and bullish crosses predicting big moves as the bear market took hold. The further apart the two lines are the stronger the trend tends to be, with the lines closing in when a trend might be coming to an end. People also use the MACD to identify bearish and bullish divergences, but this is beyond the scope of this article and will be discussed in a further one.
Limitations of the MACD
One of the main issues with a divergence is that it can often signal a possible reversal which is not followed by one – this is called a false negative. Divergences also cannot forecast all reversals, making it potentially unreliable. There is also the issue that it is a trend-following indicator, meaning that a trend could have reversed before the indicator catches up, meaning you miss the most profitable time to enter or exit a position.
MACD users can also experience false positives. These occur when the price of a token moves sideways, such as in a range when following a trend. A slowdown in the momentum of the price (sideways or slow trending movement) will cause the MACD to pull away from its former extremes and gravitate toward the zero line, even in the absence of an actual reversal.
We hope you found our guide to the MACD useful and informative. When used in conjunction with other indicators it can be very useful in highlighting a potential trend reversal, although it shouldn’t be relied upon to be correct 100% of the time. Stay tuned for next week’s Trading 101 where we will cover Elliott Waves.