What is the MACD and how to use it to trade crypto?

The world of crypto trading is fascinating. When you dive into it, you quickly realize that you need the right tools. The MACD is one of them. Very popular. But what exactly is it and how can it help you with cryptocurrencies?

The Moving Average Convergence Divergence (MACD) is a momentum oscillator that generates powerful signals. Traders love it. It is used in crypto, forex, commodities... everything. Its advantage seems to lie in the use of moving averages to capture the momentum of an asset.

Traders mix several indicators to confirm signals. Three or four, usually. Then they execute. But before combining them, each one must be understood separately.

MACD: What is it really?

It is a trend-following oscillator. It compares short-term momentum with long-term momentum. It's not complicated. It predicts trend changes, shows impulses, and reveals the relationship between two moving averages. It tells you if something is overbought or oversold.

It was created by Gerald Appel in 1979. He wanted to help measure the strength, duration, and direction of the price.

The calculation

It's quite simple:

MACD = 12-period EMA - 26-period EMA

You just subtract one exponential moving average from another. Nothing out of the ordinary.

Reading the MACD

When you apply it, you see four elements:

• MACD Line
• Signal Line
• Zero line
• Histogram

The MACD line is the basic formula. The signal line is a 9-period EMA. The zero line is where both EMAs are equal. The histogram shows the difference between the first two lines.

The MACD has no fixed limits. Not like other indicators. That's why it isn't so good for determining exact overbought or oversold conditions. It's somewhat limiting, in my opinion.

Using the MACD in crypto

The crypto market is volatile. You need security. Technical analysis is key before opening positions. The MACD generates quite strong signals.

Let's take a look at some strategies:

Signal Crosses

The most basic strategy. When the MACD line crosses above the signal line, buy. When it crosses below, sell.

Warning. These signals may fail. Quite a bit. Don't rely on just one tool.

Zero Line Crossing

Detects momentum. If the MACD crosses the zero line upwards, the momentum is bullish. If it crosses downwards, bearish. It's that simple.

Positive MACD suggests an upward movement. Negative suggests a downward movement. Long positions with positive MACD, short with negative.

MACD Divergences

This is when price and MACD move in opposite directions. A powerful sign of change.

Bullish Divergence

It happens when:

• The price makes higher lows but the MACD makes lower lows
• Either the price makes lower lows but the MACD makes higher lows.

Buy signal. The market could turn upward soon.

Bearish Divergence

Similar but the other way around:

• Price makes higher highs but MACD makes lower highs
• The price makes lower highs and the MACD makes higher highs

Sell signal. The bullish trend could be ending.

MACD vs. RSI

The RSI is also widely used. It oscillates between 0 and 100. Below 30 indicates oversold. Above 70 indicates overbought.

The MACD measures distances between EMAs. It determines trends, but it is not as accurate for overbought/oversold.

Sometimes they give contradictory signals. Experienced traders use both. More confirmation, fewer mistakes.

Conclusion

The MACD is powerful for crypto trading. It helps you see changes in trend and momentum. But using it alone is risky. Combine it with other indicators.

With practice, you will identify good entry and exit points. You will be able to anticipate pullbacks. The secret is to verify signals with multiple tools. This minimizes errors and maximizes profits. The MACD can elevate your trading to the next level. But it is not infallible.