Crypto traders strive to stay one step ahead of the crowd. If traders don’t have a position before others pile into a token—or if they fail to jump ship before a massive sell-off—they aren’t making the most profit from the crypto market’s movements. While it makes sense to identify trends as early as possible, no trader has the precognitive powers to predict future prices perfectly. There are, however, a few technical indicators that forecast the most likely scenarios for virtual currencies.
For example, traders often consult the moving average convergence/divergence (MACD) oscillator when assessing market dynamics and choosing attractive buy and sell zones for crypto assets.
Let’s explore what the MACD is, what the MACD is in trading, and how it gives traders more insight into the crypto market’s movements.
What is the MACD indicator in crypto?
The MACD is a technical analysis tool that measures the distance between two exponential moving average trendlines (EMAs) for an underlying asset. In crypto trading, particularly, it tracks the price of digital assets like Bitcoin (BTC) and Ethereum (ETH).
MACD oscillators represent the difference between a cryptocurrency’s 12-day EMA and the 26-day EMA. To calculate the MACD, crypto trading platforms subtract the 26-day EMA from its 12-day EMA. When the 12-day EMA exceeds the 26-day EMA, the MACD has a value above zero. Conversely, the MACD has a negative value whenever the 26-day EMA flips above the 12-day trendline. The MACD highlights a virtual currency’s most recent price momentum and trading activity by estimating the difference between these two EMAs.
In addition to the MACD proper, this indicator has its own EMA called the signal line, which measures the MACD’s average value over nine days. MACD oscillators also have bar charts known as histograms, which plot the difference between the MACD and the signal line. Combining these data points helps traders thoroughly read price activity and identify potential trends or divergences versus the cryptocurrency’s market price.
How to use the MACD indicator in crypto trading
Crypto traders use the MACD to get an inside look into the most recent momentum for a virtual currency and spot potential reversals as early as possible. If the MACD is above zero and higher than the signal line, the 12-day EMA has more buying activity than the prior 26 days.
As long as the MACD stays above the signal line in this scenario, crypto traders assume the bullish trend is intact. In contrast, negative MACD values below the signal line are associated with bearish market conditions, such as crypto winters and price corrections.
Besides identifying bullish and bearish situations, the MACD gives traders a glimpse into market sentiment. For example, if traders notice decreasing histogram values as the MACD crosses below the signal line for BTC, chances are the market price for Bitcoin is on a downward trend. Conversely, when histogram bars start rising and the MACD moves up, traders often expect the market price to enter a bullish phase.
These crossover patterns are particularly interesting when they contrast (or diverge) from a cryptocurrency’s market price since these different MACD values suggest the start of a price trend reversal.
Pros and cons of the MACD indicator
The MACD is a powerful trend indicator with a wealth of data to consider, but it has a few limitations. Understanding what it leaves out helps traders develop a more realistic price prediction when building a thesis for their favorite tokens.
MACD pros
The MACD’s strong suit is identifying and confirming price trends in the crypto market. By comparing two EMAs with different durations, it helps traders clearly understand the market’s current direction and whether a cryptocurrency is overbought or oversold.
The MACD contains three metrics in one graph versus other technical indicators. Besides the central MACD line, this indicator has an EMA signal line and a histogram to give traders a comprehensive view of crypto price momentum.
When data on the MACD diverges from a cryptocurrency’s price, it sometimes clues crypto traders into a significant trend reversal. Traders pay careful attention whenever these valuable bearish or bullish divergences emerge to anticipate market changes.
Although the MACD includes three metrics, traders don’t need years of training in technical analysis to figure out how to read it. As long as traders know which color represents the MACD line versus the signal line, telling when this indicator is in a bullish, bearish, or crossover stage is simple.
MACD cons
Despite the MACD’s emphasis on using the latest price feeds, it’s a backward-looking indicator. Since it relies on historical price data to generate signals, it can’t respond instantly to sudden and dramatic market changes, which sometimes results in suboptimal entry or exit signals.
Just because there’s a crossover or divergence on the MACD doesn’t guarantee anything will materialize in a crypto asset’s price. Traders relying on MACD signals when setting up trades have to factor in the possibility of false positives, especially in choppy low-volatility markets.
Unlike the equally weighted simple moving averages (SMAs), EMAs emphasize the most recent price activity. While using EMAs rather than SMAs makes the MACD better-suited for short-term trends, it doesn’t give these lines time to level out and show the complete picture of a cryptocurrency’s price. The EMA’s extra sensitivity to volatile swings sometimes helps traders capture temporary price activity but introduces more noise into the MACD’s metrics.
The MACD’s design identifies short-to-medium-term trends and momentum, making it a poor choice for traders who practice patient and gradual strategies like HODLing and dollar-cost averaging (DCA).
If traders are more interested in a long-term, passive approach to buying cryptocurrency, they can focus on longer-duration technical tools like the stock-to-flow model, 200 Week MA Heat Map, or the 2-Year MA Multiplier for better results.
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