The Moving Average Convergence Divergence (MACD) has been used in traditional finance markets for close to fifty years. Now, cryptocurrency traders are using it to spot trend changes and grow their profits. As cryptocurrency is a very volatile market, the momentum indicator can be especially useful, helping traders trade smarter as they gain an insight into short-term market moves.
Key insights
- MACD is a popular technical indicator that cryptocurrency traders use to identify the momentum of a cryptocurrency.
- Key trading signals that traders look out for are the signal line crossover, zero line crossover, and bullish and bearish divergence.
- Traders use MACD alongside other trading indicators to help them trade smarter.
What is the Moving Average Convergence Divergence (MACD) indicator?
Moving Average Convergence Divergence (MACD) is a technical indicator popular among crypto traders. It reveals the current momentum of a cryptocurrency, including its direction and strength.
There are two lines to pay attention to with the MACD indicator: the MACD line and the signal line. When the MACD crosses above the signal line, it indicates a bullish trend. Conversely, when the MACD crosses below the signal line, it shows a bearish trend. Along with the MACD and signal lines, a histogram is included in the indicator.
The histogram is simply the difference between the MACD and signal line. It’s such a useful addition to the indicator as it quickly shows you the strength and direction of the trend. When MACD is bullish, the histogram will be above the zero line, and below it when the trend is bearish. And the more the bars are increasing or decreasing, the stronger the trend.
How do crypto traders use the MACD indicator?
1. Signal line crossover
Many traders consider it a buy signal when the MACD line crosses above the signal line. If they’re watching a cryptocurrency they want to buy, they may wait for this signal to make their purchase. Conversely, when the MACD line crosses below the signal line, many traders take this as a sell signal and it can be the catalyst for them to exit their positions.
2. Zero line crossover
When the MACD moves above the zero line, this is seen as a bullish signal by traders and a bearish signal when it crosses below the zero line. Specifically, a bullish cross above the zero line means that the MACD’s shorter-term EMA is greater than the longer-term EMA.
3. Bullish and bearish divergence
When a cryptocurrency’s price is moving in one direction, but the MACD line is moving in another, it’s known as a divergence. It can signal that a trend is set to reverse or prices will rise or fall. You can identify divergence on the chart by looking at the trend of the price compared to the MACD line.
A bullish divergence can suggest a downward trend is slowing and prices may soon begin rising. Many traders take it as a buy signal. Specifically, this happens when a price makes a lower low, and yet, the MACD makes a higher low.
In contrast, a bearish divergence can indicate that buy pressure is swindling and a price reversal may be coming. The technical signal occurs when a coin’s price makes a higher high, but the MACD makes a lower higher. Traders take this as a sign of weakness in the market and can look to take profits.
Watch out for false MACD signals
MACD is undoubtedly one of the most useful technical indicators in crypto. It packs a lot of information into a simple tool. However, like all technical indicators, MACD relies on historical data and cannot predict future market moves with certainty. Always make sure you manage your risks and don’t overly rely on a single technical indicator. Luckily, there’s a lot more information available that can help you trade smarter.
Want to learn more?
Visit our learning hub to grow your knowledge and trade smarter. Many traders beginning their crypto journey dive into the Relative Strength Index (RSI), on-chain analysis, and an overview of the three main types of cryptocurrency analysis. Or if you’re ready to start trading on Cointree, you can create your account now.
Disclaimer: Information provided is for educational purposes and does not constitute financial product advice. You should obtain independent advice from an Australian financial services licensee before making any financial decisions.
