What Is a MACD Indicator in Crypto Trading?
04 May, 2023
The Moving Average Convergence Divergence (MACD) has been utilized in traditional finance markets for a long time (approximately fifty years). Nowadays, traders of cryptocurrency are employing MACD to track trend changes and increase their income. Since the cryptocurrency market is pretty volatile, the momentum indicator may be particularly beneficial in assisting traders to deal more reasonably because they receive a representation of short-term market movements. Let's sort out below in detail what is the MACD in trading and how to use it.
What Is an MACD Indicator?
Moving Average Convergence Divergence, abbreviated as MACD, is a technical indicator widespread in crypto traders' circles. MACD shows the current momentum of a cryptocurrency, involving its direction and force. While working with the MACD indicator, one should take into account two lines, such as the MACD line and a signal line. Once the MACD intersects above the signal line, it points out a bullish trend. Likewise on the contrary once the MACD intersects below the signal line, it messages a bearish trend. Aside from the MACD and signal lines, the MACD indicator likewise involves a histogram. The histogram implies just a difference between the MACD and a signal line. It serves as a helpful addition to the indicator since it reveals the force and direction of the trend fast. The histogram will be above the zero line once MACD is bullish. At the same time, the histogram will be below the zero line once MACD is bearish. The more the bars are growing and declining, the stronger the trend will be.
What Is MACD Indicator Used For?
Moving Average Convergence Divergence is a momentum indicator following a trend. Being a part of the oscillator family of technical indicators, MACD provides you with the possibility to:
- Evaluate the current direction of the trend (whether it is bullish or bearish) and forecast where the price will go with a higher probability based on the ratio between the two moving averages.
- Determine the rate of change of cryptocurrency prices, particularly the speed of the trend or its momentum. Readings of the MACD momentum are helpful in case, for instance, retail traders intend to evaluate the weakness or force of a crypto trend.
Glancing at the price chart, the MACD indicator will have the look of the oscillator with two moving averages with the exception of it having no certain boundaries in comparison with the most widespread oscillators. An extra MACD histogram is superimposed over the two moving averages. This completes the MACD indicator. MACD signals may be interpreted in several ways. In particular, MACD can assist traders to discover three main types of signals, such as signal line intersections, zero line intersections, and divergence.
Shun Spurious MACD Signals
It is vital to mention that Moving Average Convergence Divergence by itself should not be regarded as an effective way to increase your income. Undoubtedly, MACD isn't a completely reliable source of making decisions if you consider it outside of the overall market context. MACD may usually attract traders with spurious signals of a trend reversal. For instance, MACD may usually intersect above the signal line and indicate a bullish intersection, while the asset price goes downward. This signal is known as a "false positive". Similarly, when MACD indicates a bearish intersection, while the price is still growing, the signal will be regarded as a "false negative". If traders don't want to appear in this trap, they should search for different confluence signals. It would be perfect if at least three various signals coincide and be accompanied by relevant news or rumors. After that, you will have the possibility to purchase or sell a chosen crypto asset with greater confidence.
MACD is an amazing instrument for traders because of its ease and precision. This tool unites the market's momentum and its trend into a single indicator. Being a universal indicator, MACD lets make the chart less cluttered and ensures a better representation of the price action. Nevertheless, it is advisable to pay attention to other signals rather than making decisions leaning exclusively upon the MACD signals. There is no doubt that Moving Average Convergence Divergence is one of the most helpful technical indicators in crypto. MACD gathers lots of information into an easy instrument. Still, as with all technical indicators, Moving Average Convergence Divergence leans on historical data and can't forecast future market movements with 100% certainty. Thus, you should ensure you manage your risks and avoid leaning upon one technical indicator. Fortunately, nowadays, lots more information is available that can assist you to trade wisely and reasonably.