Moving Average Convergence Divergence, MACD for short, is a technical indicator that can be used to assess an asset’s momentum and determine market trajectory, enabling you to better identify emerging opportunities.
MACD crypto trading strategies use a histogram to plot the difference between an MACD line and a Signal line, made up of exponential moving averages (EMAs). Let’s start by defining all this terminology.
The MACD line is the 12-day period EMA minus the 26-day period EMA, and the Signal line is the 9-day period EMA, which is applied to the resulting value.
It is the convergence and the divergence between these lines that are displayed in the histogram and can be used to identify trend momentum. A trend that is gaining momentum will see the EMA’s diverge, and they will converge when the trend is slowing down.
You get your buy and sell signals based on whether the signal line, or 9-day period EMA, is crossing over or under the MACD line. If the MACD is trading above zero, you have a bull trend, and if it is trading below zero then this will confirm a bear trend.
Among the most popular MACD crypto trading strategies are Histogram Reversals, Crossovers, and Zero Crosses, and in this guide, we will take a brief look at each of them.
When there is a great deal of market momentum the histogram will grow in height and will shrink if the market is losing steam.
As the bars that reflect the difference between the MACD and Signal lines move further from zero, the moving average lines will have greater distance between them. Following this expansion, a hump will signal a shift as the moving average lines narrow, indicating that a crossover is coming.
One of the primary advantages of Histogram Reversals is that this is a leading strategy, so rather than just reflecting historic price action, it uses recognized trends as a basis for anticipating future price activity, enabling you to get a jump on the market and execute your strategy before the price moves.
You should follow the trend trajectory and hold out until the histogram has displayed two separate countertrend moves to be absolutely certain you are not just seeing a blip but an actual reversal.
A crossover strategy looks at the connection points between the MACD line and the Signal line to get buy and sell signals. The buy signal is identified when the shorter-term MACD line crosses above the less dynamic Signal line, whereas the sell signal is confirmed when it crosses below.
This is a lagging strategy, that is based on price activity that has already occurred and so a trade can only ever be opened only after the market has moved. This can be problematic, since when market trends are relatively weak, the price may already be reversing by the time the signal has been generated.
If the MACD line crosses zero from above in a downward trajectory, a bear trend is coming, whereas if it crosses zero from below trending upward, this will indicate an impending bull run. It is therefore a good idea to open a long position, as soon as the MACD passes above the zero line.
The slow pace of the Zero Cross strategy means you will see less signals, which in the highly volatile crypto markets can mean that, as with the Crossover strategy, you can get your signal too late to be of use. However, if you are planning to execute longer-term market moves this strategy can be very valuable as there is a lower risk of false reversals.
MACD is a popular indicator but like any other form of crypto technical analysis it requires a certain time commitment, grasp of the market and tolerance for the high risks that come from the unpredictability of the incredibly volatile crypto market.
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If you’d like to read more about crypto arbitrage, click here. Alternatively, you can check out our blog to learn about a vast selection of topics related to blockchain, DeFi, yield farming, crypto trading strategy, stablecoins and more.
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