Moving Average Convergence Divergence (MACD) is an oscillatory type indicator that is widely used by traders in technical analysis (TA). MACD is a trend following tool that uses moving averages to determine the direction of a stock, cryptocurrency, or other tradable asset.

The Moving Average Convergence Divergence indicator, developed by Gerald Appel in the late 1970s, records past price movements and therefore falls into the lagging category of indicators (providing trades based on past price action or data Signal). MACD can be used to measure market movements and possible price trends, and is used by many traders to spot potential buying and selling opportunities.

Before delving into the MACD mechanism, it is important to understand the concept of moving averages. A moving average (MA) simply represents the average of historical data over a predefined period of time. In the context of financial markets, moving averages are one of the most popular indicators in technical analysis (TA), and they can be divided into two different types: Simple Moving Average (SMA) and Exponential Moving Average (EMA) . The SMA weights all data inputs equally, while the EMA gives more weight to the latest data values (newer price points).

MACD working principle

The MACD indicator works by combining two exponential moving averages (EMAs) The subtraction generates the main line (MACD line), which is then used to calculate another exponential moving average (EMA) representing the signal line.

In addition, there is the MACD histogram, which is calculated based on the difference between these two lines. The histogram, along with the other two lines, fluctuates above and below the center line, also called the zero line.

The MACD indicator therefore consists of three elements moving around the zero line:

• MACD Line (1): Helps determine upward or downward movement (market trend). It is calculated by subtracting two exponential moving averages (EMA).

• Signal line (2): EMA of the MACD line (EMA with a period interval of 9). The combined analysis of the signal line and the MACD line helps to identify potential reversals or entry and exit opportunities.

• Histogram (3): Graphical representation of the divergence and convergence of MACD lines and signal lines. In other words, the histogram is calculated based on the difference between the two lines.

MACD line

Generally speaking, the exponential moving average is calculated based on the closing price of the asset, and the period used to calculate the two EMAs is usually set Available in 12 issues (faster) and 26 issues (slower). Periods can be configured in different ways (minutes, hours, days, weeks, months), but this article will focus on day-to-day routine settings. Nonetheless, the MACD indicator can be customized for different trading strategies.

Assuming the time frame is set to the standard range, the MACD line is calculated by subtracting the 26-day EMA from the 12-day EMA.

MACD line = 12-day EMA - 26-day EMA

As mentioned above, the MACD line oscillates above and below the zero line, which is The midline crossover signal tells traders when the relative positions of the 12-day and 26-day EMAs have changed.

Signal line

By default, the signal line is drawn from the 9-day EMA of the main line calculated and therefore can provide further analysis of its previous movements.

Signal line = 9-day exponential moving average of the MACD line

While they are not always accurate, when the MACD line and When signal lines cross, this event is often seen as a signal of a trend reversal, especially when they occur at the top of the MACD chart (well above or well below the zero line).

MACD histogram

The histogram is an intuitive record of the relative movement of the MACD line and the signal line . It is calculated by subtracting the two:

MACD histogram = MACD line - signal line

However, the histogram is not adding a third moving lines, instead consisting of bars, making it visually easier to read and interpret. Note that the histogram bars have nothing to do with the asset's trading volume.

MACD settings

As mentioned above, the default settings for MACD are based on 12, 26 and 9-period EMA - that is MACD (12,26,9). However, some technical analysts and chartists may use more sensitive cycle indicators. For example, MACD (5,35,5) or longer time frame periods are often used in traditional financial markets, such as weekly or monthly charts.

It is worth noting that due to the extreme volatility of the cryptocurrency market, increasing the sensitivity of the MACD indicator may create more false signals and misleading information, thereby creating risks.

How to read a MACD chart

As the name suggests, the Moving Average Convergence Divergence indicator focuses on the relationship between moving averages, The relationship between two lines can be described as convergent or divergent. When two lines approach each other it is called convergence, and when they move apart they are divergent.

Nonetheless, the MACD indicator related signals are related to so-called crossover points, which occur when the MACD line crosses the center line (a center line crossover occurs) above or below the high When it is above or below the signal line (signal line crosses).

Keep in mind that center line and signal line crossovers can occur multiple times, producing many false and misleading signals - especially when it comes to volatile assets like cryptocurrencies. Therefore, one should not rely solely on the MACD indicator.

Centerline Crossover

When the MACD line moves in the area above or below the centerline, Centerline crossings occur. When it crosses the center line upward, it is a positive MACD, indicating that the 12-day EMA average is greater than the 26-day average. Conversely, when the MACD line crosses the centerline downward, it is a negative MACD, indicating that the 26-day EMA average is higher than the 12-day EMA. In other words, a positive MACD indicates stronger upward momentum, while a negative MACD indicates stronger downward momentum.

Signal line crossover

When the MACD line crosses the signal line, traders usually think There is a potential buying opportunity (entry point). On the other hand, when the MACD line crosses the signal line downward, traders tend to view it as a selling opportunity (exit point).

While signal line crossovers can be helpful, they are not always reliable. We also need to consider their placement on the chart to minimize risk. For example, if a buy signal occurs when the signal line crosses, but the MACD line indicator is below the center line (negative value), the market condition may still be considered bearish. On the contrary, if the signal line crosses and a sell signal occurs, but the MACD line indicator is above the center line (positive value), the market conditions may still be bullish. In this case, a sell signal following the signal crossover may bring more risk (a larger downward trend).

MACD and Price Divergence

In addition to the center line and signal line crossover, you can also Differences between MACD charts and asset prices to spot signals.

For example, if the price action of a cryptocurrency is rising, but the MACD makes a lower high, we would consider a top divergence to occur. This situation indicates that despite the rising price, there is upward momentum. (Buying pressure) is not as strong as it was before. Top divergences are often interpreted as selling opportunities because they tend to precede price reversals.

Conversely, if the MACD line forms two rising lows that coincide with two falling lows in the asset's price, it is considered a bottom divergence, indicating stronger buying pressure despite falling prices. If a bottom divergence occurs before a price change, it may indicate a reversal of the short-term bottom (from a downtrend to an uptrend).

Summary Thoughts

In terms of technical analysis (TA), the Moving Average Convergence Divergence indicator is One of the most useful tools. Not only is it relatively easy to use, it is also very effective at identifying market trends and market momentum.

However, as most technical indicators, MACD is not always accurate and may provide a large number of false and misleading signals, especially when analyzing less stable assets or when the market is in In weak and sideways situations. Therefore, many traders also use MACD and other indicators, such as the RSI indicator, to further reduce risk and confirm signals.