Home Cryptocurrency Here’s 5 ways investors can use the MACD indicator to make better trades

Here’s 5 ways investors can use the MACD indicator to make better trades

by Serge Shlykov

In recent times, the MACD indicator has emerged as a useful tool for traders, who can use it to confirm a bullish or bearish market sentiment. However, there are a number of misconceptions about how the indicator works. In this article, we will walk you through the process of using the MACD indicator to navigate the markets.

One of the most popular indicators on the market is the MACD, or moving average convergence divergence. We can use it to help us identify trading opportunities by identifying divergences in the MACD. Read on to learn five ways that you can use the MACD to your advantage.

The crossover between technical analysis and cryptocurrencies is something I have been exploring for some time now.  Technical analysis is the practice of making a chart of a security and using the “indicator” in the center of the chart to forecast future price action.  It is important to remember that technical analysis can only help you with the assumption that one can predict the future.  Businesses, companies, and people are complex and data is limited.  In the world of cryptocurrencies and blockchain technology, the data is still limited.  So, like with any other indicator, there are multiple ways to predict the future.

Moving average convergence divergence, also known as MACD, is a trend following momentum indicator often used by traders. Although the MACD is a lagging indicator, it can be very useful in identifying potential trend changes. Daily chart BTC/USDT. Source: TradingView The MACD fluctuates above and below the zero line, also known as the center line. The shortest moving average is subtracted from the longest moving average to obtain the MACD value. The signal line, which is an exponential moving average MACD, completes the indicator. The blue line is the MACD, and the red line is the signal line. If the blue line moves above the red line it is a buy signal, and if the blue line moves below the red line it is a sell signal. The crossing of the middle line is also a buy signal. Let’s see how to use the indicator for the best entry and exit of different positions. We will then examine how the MACD is analyzed during pullbacks and in an uptrend. Finally, we briefly discuss the importance of divergences in the MACD.

Adjustment of the indicator to crypto-currency market volatility

Compared to traditional markets, cryptocurrencies have large movements in a short period of time. Therefore, the inputs and outputs must be fast to accommodate a significant amount of movement, but without too much jerkiness. When a new uptrend begins, it usually stays in place for several weeks or months. However, every upward phase also has its share of corrections. Traders need to stay in the trend and not stop at every little pullback. The goal should be to take a position before the start of a new uptrend and stay there until a reversal signal appears. However, this is easier said than done. If the indicator gives too many signals, unwanted trades are made, leading to high commissions and being emotionally draining. On the other hand, if the time frame is chosen to give fewer signals, a large part of the trend may be missed because the indicator is slow to detect reversals. This problem was addressed by Gerald Appel, the inventor of the MACD, in his book Technical Analysis: Powerful tools for active investors. Appel points out that for strong trends, two MACD indicators can be used, with the more sensitive indicator used for entry and the less sensitive one for exit. Related: Not sure if you should buy a springboard? This important trading indicator facilitates

Are two MACDs better than one?

The default value of the MACD indicator used by most chart programs is a combination of 12 to 26 days. However, for the following examples we will use a MACD with a 19-39 day combination, which is less sensitive and used to generate sell signals. The second is more sensitive and uses a 6-19 day MACD combination used for buy signals. Daily chart BTC/USDT. Source: TradingView Here’s 5 ways investors can use the MACD indicator to make better trades Bitcoin (BTC) traded in a narrow range in September 2020, and both MACD indicators were mostly flat during this period. In October, when the BTC/USDT pair started an uptrend, the MACD gave a buy signal when the indicator crossed the midpoint of October 2020. After closing the trade, watch the MACD approach the signal line (indicated by ellipses on the chart) four times in the sensitive 6-19 day MACD combination. This could have led to an early exit, leaving a significant portion of the profits on the table while the uptrend was just beginning. In contrast, it should be noted that the less sensitive combination remained stable for 19-39 days during the upward trend. This may have made it easier for the trader to stay in the trade until the MACD dropped below the 26 signal line. November 2020 dipped to the bottom and gave a sell signal. Daily chartNBB/USDT. Source: TradingView Here’s 5 ways investors can use the MACD indicator to make better trades In another example, Binance Coin (BNB) crossed the midline on July 7, 2020, which is a buy signal. However, the sensitive MACD quickly reversed and dipped on the 6th. July below the signal line when the NBB/USDT pair initiated a minor correction. By comparison, the less sensitive MACD held steady until the 12th. August 2020 above the signal line and captured most of the trend. Daily chartLTC/USDT. Source: TradingView Here’s 5 ways investors can use the MACD indicator to make better trades Traders who find it difficult to follow two MACD indicators can also use the standard 12-26 day combination. Litecoin’s (LTC) journey from $75 to $413.49 triggered five buy and sell signals. All trades generated good entry (marked by ellipses) and exit signals (marked by arrows). Related: 3 ways traders can use moving averages to read market momentum

How the MACD can signal a correction

Traders can also use the MACD to buy pullbacks. During a correction in an uptrend, the MACD drops to the signal line, but when price resumes its uptrend, the MACD rises back to the signal line. This hooked formation could be a good entry point. ADA/USDT Day Chart. Source: TradingView Here’s 5 ways investors can use the MACD indicator to make better trades In the example above, Cardano (ADA) has the midline at January 8, 2020, which is a buy signal. However, when the upward movement stalled, the MACD dipped near the 26th percentile signal line. January 2020, but did not cross that line. As price recovered, the MACD broke away from the signal line and resumed its upward movement. This gave traders who might have missed buying a cross above the centerline the opportunity to do so. The sell signal was issued on the 16th. February was formed when ADA/USDT was just beginning a deep correction.

MACD divergences can also signal a change in trend

Daily chart BTC/USDT. Source: TradingView Here’s 5 ways investors can use the MACD indicator to make better trades Between 21 February 2021 and 14 February 2021. In April, the bitcoin price continued to update highs, but the MACD indicator updated lower highs during this period, forming a bearish divergence. It was a sign that the momentum was waning. Traders should be cautious when a bearish divergence forms and avoid trading long during such a period. In this case, the long bearish divergence led to a huge drop. Daily chartLTC/USDT. Source: TradingView Here’s 5 ways investors can use the MACD indicator to make better trades Litecoin shows how the MACD formed a bullish divergence during a strong downtrend from July to December 2019. Traders who bought the cross above the midline may have been hit in September and November. This indicates that traders should wait until the price action shows signs of a trend change before reacting to MACD divergences.

Sundry important results

The MACD indicator captures the trend and can also be used to assess the momentum of an asset. Depending on market conditions and the asset being analyzed, the trader may vary the MACD period setting. If the currency moves quickly, a more sensitive MACD can be used. For slow movements, you can use the default settings or the less sensitive MACD. Traders can also use a combination of a less sensitive MACD indicator and a more sensitive MACD indicator to get better results. However, there is no perfect indicator that always works. Even with the above permutations and combinations, transactions will move in the opposite direction of expectations. Traders should apply money management principles to quickly limit losses and protect paper profits when the market moves below assumptions. The views and opinions expressed herein are those of the author and do not necessarily reflect those of Cointelegraph.com. Every investment and every transaction involves risk. So you need to do your own research before making a decision.The MACD indicator is a momentum indicator and is used to measure the direction of a trend in a given market. The indicator is a simple signal that is calculated by taking the difference between the two moving averages and then plotting the results on a histogram. When the MACD indicator reaches zero, it is a signal that the trend has started or stopped.. Read more about macd trading strategy pdf and let us know what you think.

Frequently Asked Questions

How do you use MACD effectively?

The Moving Average Convergence Divergence (or MACD) is a valuable signal for traders because it helps them identify overbought and oversold conditions. While this indicator may be great for identifying trends, it does not always work for identifying entry or exit points. The MACD is one of the most popular momentum indicators in the forex world. It’s used by traders to measure the strength of a trend in order to buy and sell. To use the MACD effectively, there are some key concepts to understand. For example, when the MACD line is rising, it means that the trend is becoming stronger, and when the MACD line is falling, it means the trend is becoming weaker.

What is the best MACD setting for day trading?

The MACD is generally considered the best indicator you can use when trading, and is a very helpful tool to determine when to buy and sell stocks. It was developed by Gerald Appel and Dr. Richard Schmalensee at the end of the 1970s and is still widely used today. The MACD is one of the most popular technical indicators that traders and investors use on a daily basis. It is most often used to signal the beginning and end of a trading period and it is one of the most important indicators in the world of technical analysis. A few traders even use it as a trading signal. It is a simple indicator that consists of two moving averages.

Is MACD a good indicator?

It’s one of the most familiar trading tools on the market. The moving average crossover (MACD) indicator is all over the internet, and is a favorite among individual traders looking to make a quick buck. But is it really this simple? Well, yes, it kind of is. But not really, because there are plenty of ways to use the indicator to your advantage that a lot of traders may not realize about. And, while it’s a simple indicator, it’s actually quite powerful as well. The MACD indicator is a popular trend-following indicator – a signal line that tracks the movement of the underlying asset. The indicator is often used as a visual representation of an uptrend or downtrend in an asset, though this is not always the case. Sometimes, it is used in the opposite way to predict a reversal in a trend.

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