MACD indicator

MACD indicator

What is the MACD indicator?

Moving Average Convergence Divergence (MACD) is an indicator that traders commonly use for technical analysis. But how can you make most of these indicators?
It is a tool to follow the market trend that uses the moving average to determine the movements of a stock, cryptocurrency, or any other tradable asset.
The MACD Indicator, developed by Gerald Apple in the late 1970s, tracks past price events and, therefore, falls into lagging indicators (providing signals based on previous performance or data). It can be competent for measuring market movements and possible price trends and helps traders to identify potential entry and exit points.
It is significant to understand the concept of moving average before examining the suction mechanisms.

Moving Average (MA) is a line that displays the average of previous data over a predefined period. In the field of financial markets, the moving average is one of the most popular indicators for technical analysis, which divides into two different types:

  • Exponential Moving Average(EMA)
  • Simple Moving Average (SMA)

While SMA treats all input data equally, EMA gives more importance to the latest data values.

How MACD works?

How MACD works

Subtracting the two exponential create the MACD indicator moving averages to form the mainline (MACD line).
In addition, there is a MACD histogram. This histogram will fluctuate along with two other lines above and below a centerline known as the ‘zero lines’
Thus, the MACD indicator consists of three main elements that move around the zero lines.

  1. The MACD line determines an uptrend or downtrend (market trend), which is calculated by subtracting two exponential moving averages.
  2. The signal line is an EMA of the MACD line that can be used for potential outages or entry and exit points.
  3. The histogram graphically shows the divergence and convergence of the MACD line and the signal line.

In general, the final price (closing time of a candle) of an asset measured the moving average, and the cycles used to calculate the two EMAs are usually 12 cycles (faster) and 26 cycles (slower). These courses configure in different ways (minutes, hours, days, weeks, months), but in this article, we will look at daily courses.
Assuming standard time intervals, the MACD line is calculated by deducting the 26-day EMA from the 12-day EMA:

MACD line = 12d EMA – 26d EMA

As mentioned, the suction line oscillates above and below zero lines, which creates a central intersection line. It notifies Traders when the EMA changes its relative position over a 12-day, 26-day period.

Signal line

By default, the signal line is the 9-day moving average of the mainline. Hence, it gives us more information about its previous movements.

Signal line = 9d EMA of MACD line

When the MACD line and the signal line intersect, they are usually considered as out-of-trend signals when they occur at the end of the MACD chart (much higher or lower than the zero lines).

MACD Histogram

The histogram is nothing more than a visual record of the relative motions of the MACD line and the signal line.

MACD histogram = MACD line – signal line

However, instead of adding a third moving line, the histogram is made up of a bar chart that is visually easy to read and interpret. Note that histograms have nothing to do with the trading volume of an asset.

MACD Setting

As mentioned, the default MACD settings are based on 12-day, 26-day, and 9-day EMAs. However, some technical analysts modify these cycles to create a more sensitive indicator. For example, the MACD (5, 35, 5) is one of the most common ones in financial markets over long periods.
Due to the high volatility of the cryptocurrency market, increasing the sensitivity of the MACD indicator may be dangerous.

How to read MACD charts?

The MACD indicator, as its name implies, tracks the relationship between moving averages. The type of correlation between the two lines can be described as convergent or divergent. They are convergent when the lines are oriented towards each other and divergent when they are apart.
However, MACD indicator signals are still based on “intersections” that occur when a suction line crosses above or below the centerline or above or below the signal line.
Keep in mind that the intersection of the signal line and the centerline can happen several times. Therefore, in the case of volatile assets such as cryptocurrencies, the MACD should not be relied upon alone.

Center line intersection

The intersection of the centerline occurs when the suction line moves in the positive or negative region. The positive zone is the passage of the suction line above the centerline, which indicates that the 12-day moving average is stronger than the 26-day period of this index.
In contrast, the negative area is the passage of the MACD line below the centerline, which means that the 26-day moving average is stronger than the 12-day moving average. In other words, a positive MACD line indicates a strong uptrend and a negative suction line indicates a strong downtrend.

Signal line intersection

When a MACD line crosses the signal line, traders often interpret it as a potential buying opportunity (entry point). On the other hand, when the MACD line crosses below the signal line, traders tend to think of it as a selling opportunity (exit point).
Although signal line intersections can be efficient, they are not always reliable. For example, if the signal line intersection signals the start of the buying process but the MACD indicator is below the center line (negative), market conditions will continue to decline.
On the other hand, if the intersection of the signal line indicates sales, but the MACD indicator is above the centerline (positive), market conditions are still bullish. In such a scenario, following the sell signal carries more risk.

conclusion

When it comes to technical analysis, the MACD is one of the most common tools available; Not only because of its ease of use but also because of its proficiency in identifying market trends and movements.
However, the MACD, like most technical indicators, is not always accurate and may provide numerous false and even misleading signals; As a result, many traders use the MACD alongside other indicators, including the RSI, to reduce their risk.

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