MACD indicator in crypto trading explained - how to read and use it?
When it comes to cryptocurrency trading, there’s a lot of terms, indicators, and signals that you should learn how to use them to your advantage. One of these is the ever popular MACD indicator, but what is this and how do you use it right?
In this article, we’ll be talking about this extremely useful trading indicator and how you can utilize it to make better crypto trades. Here’s everything that you need to know about using the MACD indicator for trading cryptocurrency coins and tokens.
What is the MACD indicator
MACD is an indicator that is used to determine when and where new trends on the market will appear. It can be used to identify either bullish or bearish movements depending on the slope of the current trend.
It’s a popular indicator for cryptocurrency day traders, and it’s the one that you should make sure to use as an an integral part of your trading strategy. MACD stands for Moving Average Convergence Divergence.
What does the MACD indicator measure
The MACD indicator measures the difference between the current MACD and the EMA. The EMA is the Exponential Moving Average of the asset. This formula allows traders and investors to draw trend lines which could benefit them in the future. The formula is incredibly useful in measuring the strength of an asset price movements.
How does it work
The MACD is created by subtracting a 6-week EMA from a 12-week EMA. That calculation creates the MACD line. A newly calculated nine-day EMA of that MACD is laid on top of the original MACD line, becoming the signal line.
When the MACD manages to rise up above the signal line, that’s your chance to sell your assets before a correction wrecks your day. If it falls below, then it’s probably time for you to begin buying more assets for the next price bump.
How to use and read MACD in cryptocurrency trading
It’s possible to use the MACD indicator for crypto trading just like you can for stocks on regular financial markets. Follow the formula above to plot out the signal line, and see what it does.
If you happen to see the MACD value going above the signal, then it might be time to sell. If you see it going below the line, then it might be time to buy.
Can MACD show when to buy and sell crypto assets
No strategy is foolproof, but by learning the best way to use the MACD indicator you’ll get a better idea of how the market you’re trading in functions. You can use this knowledge to make better profit by following the trend lines which you have mapped.
Is MACD indicator useful for crypto day trading
Yes, many traders use MACD for day trading cryptocurrency every day. However, it’s not the only trading signal which you should learn to apply, and you probably will not want to rely on just one signal in your trading strategy .
Instead, learn to use many different ones to get a better idea of where the market is headed. However, if you’re looking to get into day trading, then the MACD can provide valuable insights that can assist you in deciding whether to buy or to sell, if you learn to use it properly.
Can MACD be used for scalping
MACD can be an excellent indicator for scalping. After identifying what your trading strategy will be, you can use the MACD indicator to trigger your trade. If you’ve already decided whether you will short or go long, then you just need to set up your indicators and wait until the market agrees with your strategy before you strike.
Be careful though, sometimes crypto can perform unpredictably. However, if you invest only small portions of your capital, it’s possible to make big gains using MACD in conjunction with scalping.
Why MACD may not work for cryptocurrency
Cryptocurrency markets behave differently than other financial markets. There’s a lot of volatility here, and sometimes traditional financial indicators like MACD are not prepared for the shifts that take place. If very large drops happen all at once, then that might throw off your system, so keep that in mind.
Never trade with more than you can afford to lose. There’s a serious risk with trading, and you should learn to do it consciously. You should also probably set stop-loss orders that can save your capital in case you’re very wrong in your predictions.
MACD bullish divergence
A bullish divergence can be formed if a coin or token shows a lower low point but the MACD forms a higher low on its respective chart. The first confirms the asset current downtrend. The higher number clearly shows less downward momentum though and this is important.
Slowing downward momentum here can sometimes be an indicator of a pretty good size trend reversal or even a very profitable rally, and you’ll need to be careful if this pops up on your chart, because the results could be unpredictable.
MACD bearish crossover
A bearish crossover is a good indication that short sellers are taking over the market. If you see this pop up on your MACD chart, then it’s likely that the asset you’re trading could soon experience a dramatic price drop. Continue to monitor its activity and then possibly make a move to preserve your capital if you feel action is warranted.
MACD vs RSI
RSI is the relative strength indicator. The MACD is used to measure the strength in the price of a coin or token movement. However, the RSI is used to determine if the coin or token that you are trading is overbought or oversold depending on where the current price is.
Both are an important part of any trading strategy, and you should compare all of the indicators available to you if possible.