As a good crypto industry investor, it is paramount to have the requisite technical analysis skills. One way of achieving this is by having an understanding of simple technical tools like the MACD.
The Moving Average Convergence Divergence is a special type of indicator that follows the trend of an asset to show it’s moving average price. Primarily, the tool is used to demonstrate how two exponential functions of a moving average are related. The exponential moving average that moves fast is determined in the first twelve days of the set period while the slow exponential moving average is represented by a period of twenty-six days.
How to use the Moving Average Convergence Divergence indicator
The MACD is calculated by subtracting the 26-day period EMA from the 12-day period exponential moving average. The results obtained from this formula give a line known as the Moving Average Convergence Divergence line. The MACD line serves as a trigger line for buying and selling signals. When the MACD of a given currency crosses over this signal line, crypto traders can buy it and if the currency’s MACD crosses below the signal line, then it’s time to sell.
It is important to note that MACDs have several interpretations, but the most commonly used are the divergence, rises/falls and crossovers.
As stated, when the MACD goes below the signal line, it indicates that the currency is experiencing a bearish run, hence its best to sell at that time. The opposite applies, when the MACD crosses above its signal line. That indicates a bullish run and prices may take an upward trajectory. However, it is essential to note that for the MACD indicator to be relied on, it has to conform to the prevailing market trends.
A divergence occurs when the MACD forms diverging highs and lows from existing highs and lows of the current price. Therefore, when the MACD creates two rising lows that correspond to similar falling lows of the price of an asset, a bullish divergence is confirmed.
On the other hand, when the MACD develops two dropping highs that correspond to two rising highs on the price of the cryptocurrency, that indicates that a bearish divergence has been created.
Rapid rises and falls
When the MACD of a cryptocurrency falls or rises rapidly, this signifies that the currency is being overbought or being oversold and traders should expect it to return to its normal levels. This analysis is more effective when combined with other technical analysis tools that are used to show overselling or overbuying, like the Relative Strength Index.
When the value of the shorter EMA is more than that of the longer EMA, then the MACD will have a positive value, and the MACD value will be negative when the value of the short EMA is less than that of the 26-day EMA.
In most cases, the MACD results are presented on a histogram that shows the distance between the signal line and its MACD.
Limitation of using the Moving Average Convergence Divergence indicator
One of the most common drawbacks of the MACD is that it is prone to producing false positives and also may produce excess reversals that do not occur.