1) What exactly is MACD indicator?
MACD indicator (short for Moving Average Convergence/Divergence), is an oscillator used to identify the selling and buying signals where there appears good price based on market psychology. It was invented by Gerald Appel in 1970 and has been widely used ever since.
MACD at its core
MACD = EMA (12-day) – EMA (26-day)
The EMA average is one effective method when it comes to trading. It can demonstrate resistance and support or analyze trends in price.
As EMA 12 crosses EMA 26, MACD will cross the Zero line. If EMA 12 heads above EMA 26, MACD will be of positive value. If EMA 12 heads below EMA 26, MACD will then be of negative value. So it can be seen that the MACD line will always be shifting around the Zero line.
- Signal = MACD’s 9-day EMA
- Histogram = MACD – Signal
The histogram is a crucial component of MACD. When MACD is above the signal line, the histogram will bear positive values and lay above the Zero line. When MACD is below the signal line, the histogram will bear negative value and lay below the Zero line.
The fundamental of MACD is similar to that of EMA, thus MACD crosses Zero line upward suggests speed up and MACD crosses Zero line downward suggests a slowdown.
Why 12, 26 and 9?
In the finance field, people only work 6 days out of a 7-day week and take Sunday off. The number 12 here describes 2 work weeks, while 26 describes a month and 9 describes 1 week and a half. These are the numbers made to assess investors’ outlook in a period of time, particularly 2 weeks, 1 month or 1 week and a half. Depends on your market type and experience, you can choose either 9, 12 or 26 for usage.
2) How to use in trade coin?
The simplest method is to watch the direction in which the MACD is crossing the signal line. MACD passing above signal line means potential buy signals while passing below means potential sell signals. Nonetheless, this method often proves ineffective as the signals are fairly behind causing traders to lose opportunities whenever the best price appears. Hence let’s look into some other RSI methods frequently used by traders.
MACD divergences
As seen from the graph, the later low is beneath the previous low, however, MACD is demonstrating that the later low is upper compared to the previous low.
Consequently, there is a good chance of price redirecting at the later low. Even so, it’d be smart to incorporate the candlestick chart (also other kinds of charts) or RSI to see whether the section is overbought, in order to make entries more sensibly.
Take Profit and Stop Loss in Forex are pretty identical to buy signals. Take a look at yourself if necessary.
MACD histogram
Being the essence of MACD, the histogram can resolve the major weakness of MACD. MACD divergences are rare in the crypto market, thus it gives little chance for good deals. If you’re looking for a better result, here is the efficient MACD histogram divergences.
As seen on the price chart above, the later high is above the previous high, also, the same goes for the MACD line. This indicates that there is no selling signal here. On the other hand, the histogram shows divergence to the price chart, when the later high is lower than the previous high. At this point, you can make sell entries without much further ado, unlike when you have to wait for MACD to cross the signal line.
Histogram delivers buy signals as well as sell signals. There is nothing such as certainty in coin trade. You should distribute capital efficiently in order to manage risks and boost interest resistance.
3) The drawback of MACD
MACD is the difference between the two EMA lines, therefore it has the same drawback of EMA which is excessive sensitivity to price. This characteristic makes MACD a better choice when used in a long time frame.
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