Highlights
①. Gate’s “Basic Futures Courses” course introduces various methods of technical analysis that are commonly employed in futures trading. These courses aim to help traders establish a comprehensive framework for technical analysis. Covered topics include the basics of Candlestick charts, technical patterns, moving averages, trend lines, and the application of technical indicators.
②. This piece will introduce the application of MACD, which is known as the king of indicators. The article will delve into the composition, technical meaning and application of the indicator.
1. Why is MACD called king of indicators?
The MACD, or Moving Average Convergence Divergence, is renowned as the premier tool for market analysis, and is the first indicator that beginners in crypto trading should learn. Known as a classic and versatile tool, it’s often called the “King of Indicators” for its effectiveness in technical analysis. Here’s an example of how the MACD indicator looks:
The significance and applications of the MACD indicator in trading:
①. The MACD indicator is widely used by traders for its proven effectiveness and practicality in real-world trading scenarios.
②. Derived from the Exponential Moving Average (EMA), the MACD is an oscillator that aids in analyzing markets, performing well in both trending and sideways conditions.
③. MACD divergence is considered a powerful tool for implementing a strategy of “buying low and selling high.
④. Frequently utilized by traders, the MACD helps pinpoint optimal entry and exit points, assisting in decisions to buy or sell and in assessing whether the market trend is up (bullish) or down (bearish).
2. What is MACD?
The MACD, developed by Gerald Appel, stands for Moving Average Convergence Divergence and is referred to as “指数平滑异同移动平均线” in Chinese.
This indicator is composed of three elements: DIF (the difference), DEA (the average of the difference), and BAR (the histogram). In the illustration below, DIF appears as a white line, also known as the “fast line,” while DEA is shown as a yellow line, referred to as the “slow line.” Initially, the MACD was only made up of these two lines, which were used to assess market momentum by observing their convergence or divergence.
The BAR, often called the “red and green bars,” was introduced as the MACD gained popularity. These bars are not separate components but rather a complementary feature that enhances the utility of the indicator for traders. They represent the distance between the fast and slow lines, providing a clear visual cue for traders to quickly grasp market dynamics.
3. Application of MACD
（1）DIF and DEA values and relative positions
①. When DIF and DEA are both greater than 0 (above the 0 axis) and moving upward, it means that the market is going bullish and suggests traders to buy assets or maintain holdings.
②. When both DIF and DEA are less than 0 (below the 0 axis) and moving downward, it means that the market is bearish and advises traders to sell assets or wait and see.
③. When DIF and DEA are both greater than 0 (above the 0 axis) but are moving downward, it indicates bullish momentum is diminishing and suggests high potential for immediate decline, so traders should sell assets or wait and see.
④. When DIF and DEA are both less than 0 (below the 0 axis) but are moving upward, it means that the recovery can be expected soon and the price is very likely to increase, so traders should buy assets or maintain holdings waiting for their appreciation.
（2) DIF and DEA Intersection
①. When DIF and DEA are both above the 0 axis, and DIF breaks above DEA, it indicates a strong momentum of the current bullish move, and an imminent rise can be expected. The situation suggests users to increase their positions or maintain holdings waiting for their appreciation. The intersection is known as the MACD gold cross. Below shows an example of the pattern:
②. When DIF and DEA are both below the 0 axis, and DIF breaks above DEA, it indicates likelihood for market reversal from bear to bull, so traders are advised to buy assets or maintain the current holdings. This pattern represents another MACD gold cross. As shown below:
③. When DIF and DEA are both above the 0 axis, but DIF breaks down DEA, it indicates that bullish momentum is weakening and decline might ensue, suggesting users to sell most of their holdings. The pattern is known as MACD death cross.
④. When DIF and DEA are both below the 0 axis, and DIF breaks down DEA, it indicates that the bearish trend will gain further momentum to subsist and price will continue to decline, so it suggests traders to sell their assets out or wait and see. The intersection is the other MACDr death cross.
(3) MACD divergence
①. Bottom divergence (Bullish divergence)
MACD Divergence is identified when there’s a discrepancy between the price reaching new extremes and the MACD failing to post new corresponding highs or lows. With bottom divergence, the price sets a new low, yet the DIF line of the MACD does not match this movement at the same time.
Also known as bullish divergence, bottom divergence indicates that the bullish side is starting to build momentum, suggesting the market may have reached its low point and could be poised for an upward reversal. While it can signal a potential bottom reversal, it’s not advisable to use bottom divergence as the sole basis for trading decisions. It’s recommended to seek confirmation with other technical indicators, such as price line breakthroughs of a trend line or the 30-day moving average. Below is an illustration of bottom divergence.
②. Top divergence (Bearish divergence)
Top divergence occurs when the price hits a new high but the DIF indicator of the MACD does not create a new high simultaneously.
This phenomenon, also referred to as bearish divergence, suggests that the market’s bullish momentum is waning and that the bears are starting to take control, signaling a potential market peak and a likelihood of a downward reversal. Top divergence is considered a bearish reversal signal, but it should not be used in isolation for trading decisions. Instead, it’s more reliable when confirmed with additional technical indicators. For instance, the bearish signal is strengthened if top divergence coincides with the price breaking through a trend line or falling below the 30-day moving average. An example of top divergence is illustrated below.
4. Issues of attention
①. Divergence can be followed by another divergence
Beginners in technical analysis often seek out MACD Divergence, considering it a dependable indicator for timing market entries and exits, such as “buying the bottom or selling the top.”
Seasoned investors, on the other hand, approach MACD Divergence with a more measured perspective. While they recognize its usefulness as a common sign of trend reversal, they understand that it’s not infallible. In the context of trading, there are instances where what seems like a peak may be succeeded by another peak, and a perceived bottom may lead to a further drop, as strong trends do not reverse easily. Occasionally, what appears to be a reversal in a strong trend may just be a temporary consolidation. Therefore, the tops and bottoms identified by MACD Divergence could be misleading, potentially leading to another divergence that resumes the prevailing trend.
②. Avoid overly reliance
Novice traders often place too much faith in an indicator after a few successful trades, sometimes even considering it infallible and believing they can master the market with this one tool alone. However, those who fall into this trap usually pay a heavy price. Relying excessively on a single indicator typically leads to losses over time. The prudent strategy is to blend the use of the indicator with fundamental analysis and other technical tools to achieve a more precise grasp of the market dynamics. It’s by integrating these approaches that traders can enhance their chances of success in the unpredictable market.
5. Summary
The MACD is often hailed as the “King of Indicators,” and if there’s one indicator that’s essential to learn, it’s this one. To effectively utilize the MACD, it’s important to understand both its strengths and weaknesses, and to mitigate any drawbacks by incorporating additional methods of technical analysis.
Start trading futures by registering on Gate Futures.
Disclaimer
This article is for informational purposes only and does not constitute investment advice. Gate is not responsible for any investment decisions you make. Content related to technical analysis, market assessments, trading skills, and traders’ insights should not be considered a basis for investment. Investing carries potential risks and uncertainties. This article offers no guarantees or assurances of returns on any type of investment.
