What is MACD? A MACD trading strategy example

Today we want to talk about one of the essential technical analysis indicators – the MACD indicator. This blog post will discuss what a MACD indicator is, how it works, and what the best MACD trading strategies are.

What is MACD – moving average convergence divergence

MACD (or MAC-D) is a technical indicator that is used across all financial markets and shows cryptocurrency’s momentum, as well as trend duration and direction. MACD indicator includes the following components:

• MACD line

These are the two exponential moving averages – 12-day EMA and 26-day EMA. MACD line is usually a blue line on the chart.

• Signal line

The 9-day EMA is used as a signal line and marks buy and sell signals. On the chart, it’s shown as an orange line.

• Histogram

A MACD histogram shows the difference between the signal line and the MACD line. If the lines are above the zero line, the histogram will be positive. If the lines cross a zero line and go below it, the MACD histogram will be negative accordingly.

In the picture below, one can see a Bitcoin (BTC) 1-hour interval with all the MACD indicator components.

MACD trade signals

The MACD indicator is essential in technical analysis, as it provides lots of useful information that can be used with other technical indicators. Coupled with other tools, the MACD histogram improves one’s understanding of what is currently happening to a market price and how it can shortly change. We’ve prepared a detailed overview of the best MACD trading signals:

• Signal line crossover (9-day EMA)

A signal line is an indicator of a MACD indicator (12-day and 26-day EMAs). In other words, it lags behind the MACD line and also works as a trend-following indicator.
Bullish signal line crossover happens when the MACD line crosses above a 9-day EMA. Conversely, a bearish signal line crossover occurs when this moving average crosses below the MACD line.

Let’s look at the BTC price chart below:

Here one can see the bullish signal and the upward price movement on the right – the histogram is positive and coloured in green. In the next signal line crossover, the trend turns bearish. It was a bearish sell signal and the histogram turns red accordingly.

• Zero line crossover

This MACD signal works similarly to the one we described above. However, in this case, the MACD line crosses a zero line instead of a signal line. Bullish zero line crossover is when a MACD line goes above the zero line and turns positive. Bearish zero line crossover is the opposite – when a MACD line crosses below a zero line and turns negative.

We’ve taken the same BTC price chart but now marked zero line crossovers on it. With the bearish zero line crossover, one can see how the histogram turns red or negative. Bullish zero line crossover, in its turn, makes the histogram positive or green.

• MACD divergence

Divergence happens when the MACD lines differ from the asset’s actual price. Bullish divergence is when the price goes lower low but the moving averages are higher low. A bearish divergence occurs when the moving averages are lower high but the price records are higher high.

The best MACD trading strategy

The MACD indicator gives crucial information on trends and price movement. This tool shows whether the market goes up or down, and is especially beneficial in day trading because it includes not one, but a few exponential moving averages.

Nevertheless, for the best trade results, it’s recommended to combine the MACD histogram with other technical analysis indicators. What’s more, only profound knowledge and understanding of how the crypto market works can help to differentiate between true and fake signals.

Now, we will briefly overview the most common strategies in MACD trading:

• MACD crossover

This MACD trading strategy is the most simple one and is based on the following rules:

• • Long/short – choose long MACD signals when the asset’s price is above the 200 period-moving average.
  • Entry – buy when MACD crosses a zero line above
  • Exit – sell when MACD crosses a zero line below

Let’s see how it looks on the chart:

• MACD + Money Flow Index (MFI)

MFI is an oscillator that focuses on both the price and volume of a digital asset. That is why it produces fewer buy and sell signals. This trading strategy combines moving average divergence convergence crossover and the overbought/oversold signals that we get with MFI.

When the MFI signals for overbought crypto, wait for a bullish MACD crossover (the MACD line is above the signal line) and go short. With an oversold signal, wait for a bearish MACD crossover (the signal line is above the MACD line) and go long.

• MACD + TRIX indicator

This indicator is a momentum oscillator and works just great paired with the MACD histogram. TRIX combines triple exponential moving average and momentum. For this trading strategy, you’d need to match the MACD lines crossovers with the TRIX indicator crossing a zero line. Whenever this happens, enter the market and wait for the asset’s price to move up or down.

FAQ:

What is a MACD strategy in trading?

This trading strategy suggests using a moving average convergence divergence (MACD) indicator to get sell and buy signals. This tool consists of MACD lines (2 exponential moving averages) and a MACD histogram. For the best results, it's recommended to combine the MACD indicator with other technical analysis tools.

What is the best MACD trading strategy?

Fortunately or unfortunately, no MACD trading strategy will work perfectly well for each cryptocurrency and each trader. A moving average convergence divergence indicator (MACD indicator) is, undoubtedly, an essential tool in trading. However, the choice of a trading strategy here will depend on the trader's experience, skills, and knowledge. For instance, beginner investors might rely on solely MACD histogram. Experienced traders, in their turn, will make use of more advanced tools and combine them with the MACD indicator. Some of the most popular trading strategies with using moving average convergence divergence are MACD crossover, MACD+TEMA, MACD+Awesome Oscillator, etc.