What Is a MACD Indicator?Moving average convergence divergence indicator (MACD) refers to a momentum oscillator used for a trend following trading strategy. There are two lines, a MACD line and a signal line. When the MACD line crosses above the signal line, MACD is signaling a bullish trend.
The MACD line is calculated by subtracting the 26-period EMA (exponential moving average) from the 12-period EMA. The signal line, on the other hand, is just a 9 period EMA line.
While most technical indicators only provide a single piece of information about historical price data, the MACD indicator is a versatile 2-in-1 indicator that gauges trend direction and the strength of a trend at the same time.
In this article, we will study the MACD indicator in detail and share some advice on how MACD can be used in cryptocurrency trading and how to identify potential MACD buy and sell signals.
Invented by Gerald Appel 1979, MACD can help investors calculate the direction, length, strength and momentum of a given asset’s price.
MACD Indicator Explained in Detail:
MACD is a trend-following momentum indicator that is part of the oscillator family of technical indicators. It allows you to:
Assess the current trend direction (bullish or bearish) and predict where the price is more likely to go, based on the relationship between two moving averages.
Measure the rate of change of cryptocurrency prices, aka the speed of the trend or its momentum. The MACD momentum readings are useful if, for example, retail traders want to assess the strength or weakness of a crypto trend.
On a price chart, the MACD indicator looks like an oscillator with two moving averages, except without specific boundaries such as the most common oscillators (Stochastic and RSI) have. An additional MACD histogram overlays the two moving averages, which completes the indicator.
To understand what MACD is and how it works, we need to learn the meaning of the moving average (MA) first. When talking about cryptocurrency price movements, MA represents the line on a graph that shows the average value of data collected over a defined period of time.
Traders categorize MAs into two key types: simple moving averages (SMAs) that process all input data equally, and exponential moving averages (EMAs) that grant more weight to the recent data. MACD relies on the latter, as they provide data that is more relevant for making decisions whether it’s worth buying or selling the asset.
Perhaps the best characteristic of the MACD indicator is its simplicity, as the signals it provides are obvious even to total newbies.
However, it’s worth remembering that one should never make a decision to buy or sell some specific coin by relying solely on one signal. MACD can be a great addition to other trading signals such as Stochastic or RSI indicators. Some details about RSI will be given later in this guide.
How MACD Works?
In order to understand how to use an MACD indicator, it’s important to understand its particulars on a graph. The MACD indicator is comprised of three key components:
The MACD Line — the fastest moving average (short-term EMA)
The MACD indicator formula is calculated by extracting a long-term, 26-day exponential moving average (EMA) from a short-term, 12-day EMA. It is usually colored blue.
MACD Line = (12-day EMA minus 26-day EMA)
The Signal Line — the slowest moving average (long-term EMA)
This is a 9-day line designed to show the turns of the price action, usually painted in red.
Signal Line = 9-day EMA of MACD Line
The MACD Histogram — fluctuates above and below a zero line, which helps to identify bullish and bearish momentum readings
The histogram is the difference between the first two elements (MACD line minus signal line). When MACD is above the signal line, the histogram is positive, and vice versa.
Thus, in order to read the signal correctly, one should check the following:
When MACD is positive and the histogram is increasing as well, this serves as a sign of increasing momentum. The price tends to grow in this case, which can be interpreted as a “buy” signal.
Alternatively, when MACD is decreasing together with the histogram value, it signifies that the price is most likely dropping and the asset should be sold.
In the next section, we will provide a more detailed explanation of how to read the MACD signals.
