Lesson 2: MACD Indicator - The heart of technical analysis
Hello Friends,
Welcome to the Lesson 2. I hope y'all had been waiting for this one. Hopefully you all understood the first lesson on RSI really well, because this indicator when used with RSI, can do wonders in your trading style.
Lets get straight to the lesson without wasting any time.
Today we will study MACD (Moving Average Convergence Divergence) indicator. This is one of the most used indicators in technical analysis. This indicator fluctuates above and below the zero line. It highlights both the momentum and the trend direction of a coin. It may sound complicated, but it is fairly simple to use. In this lesson we will talk about how to use the indicator effectively, and what are some of the limitations it has.
MACD Setup:
As you can see in the chart, we have the MACD line in blue, and the signal line in orange. I prefer using the default setting for the MACD indicator as follows:
MACD Line: 12-26 day EMA (Exponential Moving Average)
Signal Line: 9 day EMA of MACD line
How do we trade with MACD?
So basically there are three types of signals within MACD:
1. Zero-Line crossovers
2. Signal Line crossovers
3. Divergence
Lets go over each one of them in detail, and I will stay as clear as possible in explaining it to you.
1. Zero- Line Crossovers:
Note: The Zero line is the dashed line I have drawn right in the middle of the MACD indicator on the chart.
In simple terms, When the MACD line moves across the zero line, it basically means that the 12 day EMA (Exponential Moving Average) is crossing the 26 day EMA.
When MACD crosses the zero line from below, it might be the beginning of a new bullish trend. Similarly, when the MACD crosses the zero line from above to below, a new downtrend might be starting up.
In the chart example, we can see that there is a bullish trend going on right now, but there aren't too many zero line crossovers on MACD. I have marked some crossovers in yellow circles. You can clearly see that when the MACD crosses the Zero line from below to above, we see a price rise along with the MACD line rise until the MACD turns down towards the zero line. Similarly, when the MACD crosses the Zero line from above to below, we see a dip in the price.
The strategy is simple. When we are looking to buy using MACD, we buy when the MACD line crosses the zero line from below. And then see it in profit whenever you are comfortable. When you have been holding a coin for a long time, and you see the MACD line crossing the zero line from above, that usually is a sell signal. It is a good time to sell if you are in profit. Basically you hold long trades until MACD crosses below the zero line. This method is profitable when strong trends emerge.
Isn't this part simple? Good. Read it again so that you get one part of the MACD indicator really well before moving on to the next two signals. See the chart carefully.
Keep in mind, this is not the only signal you use when you are trading.
Now lets move onto the Signal line Crossover method. Read this carefully. Very important.
2. Signal Line Crossover:
For this method we are going to look at the small arrows I have drawn on the charts showing the up and down movements both in the MACD indicators and the price chart.
This method is preferred by most traders in crypto. It provides you more accurate timing compared to the previous method.
It is very simple. We get a buy signal when MACD line (Blue) crosses the signal line (Orange) from below to above. Basically in the bullish direction. Similarly, we get a sell signal when MACD line (Blue) crosses below the signal line (Orange). From this method, we will get an early signal compared to the previous method we discussed. This will give us better and accurate results.
Continue reading below.....
Welcome to the Lesson 2. I hope y'all had been waiting for this one. Hopefully you all understood the first lesson on RSI really well, because this indicator when used with RSI, can do wonders in your trading style.
Lets get straight to the lesson without wasting any time.
Today we will study MACD (Moving Average Convergence Divergence) indicator. This is one of the most used indicators in technical analysis. This indicator fluctuates above and below the zero line. It highlights both the momentum and the trend direction of a coin. It may sound complicated, but it is fairly simple to use. In this lesson we will talk about how to use the indicator effectively, and what are some of the limitations it has.
MACD Setup:
As you can see in the chart, we have the MACD line in blue, and the signal line in orange. I prefer using the default setting for the MACD indicator as follows:
MACD Line: 12-26 day EMA (Exponential Moving Average)
Signal Line: 9 day EMA of MACD line
How do we trade with MACD?
So basically there are three types of signals within MACD:
1. Zero-Line crossovers
2. Signal Line crossovers
3. Divergence
Lets go over each one of them in detail, and I will stay as clear as possible in explaining it to you.
1. Zero- Line Crossovers:
Note: The Zero line is the dashed line I have drawn right in the middle of the MACD indicator on the chart.
In simple terms, When the MACD line moves across the zero line, it basically means that the 12 day EMA (Exponential Moving Average) is crossing the 26 day EMA.
When MACD crosses the zero line from below, it might be the beginning of a new bullish trend. Similarly, when the MACD crosses the zero line from above to below, a new downtrend might be starting up.
In the chart example, we can see that there is a bullish trend going on right now, but there aren't too many zero line crossovers on MACD. I have marked some crossovers in yellow circles. You can clearly see that when the MACD crosses the Zero line from below to above, we see a price rise along with the MACD line rise until the MACD turns down towards the zero line. Similarly, when the MACD crosses the Zero line from above to below, we see a dip in the price.
The strategy is simple. When we are looking to buy using MACD, we buy when the MACD line crosses the zero line from below. And then see it in profit whenever you are comfortable. When you have been holding a coin for a long time, and you see the MACD line crossing the zero line from above, that usually is a sell signal. It is a good time to sell if you are in profit. Basically you hold long trades until MACD crosses below the zero line. This method is profitable when strong trends emerge.
Isn't this part simple? Good. Read it again so that you get one part of the MACD indicator really well before moving on to the next two signals. See the chart carefully.
Keep in mind, this is not the only signal you use when you are trading.
Now lets move onto the Signal line Crossover method. Read this carefully. Very important.
2. Signal Line Crossover:
For this method we are going to look at the small arrows I have drawn on the charts showing the up and down movements both in the MACD indicators and the price chart.
This method is preferred by most traders in crypto. It provides you more accurate timing compared to the previous method.
It is very simple. We get a buy signal when MACD line (Blue) crosses the signal line (Orange) from below to above. Basically in the bullish direction. Similarly, we get a sell signal when MACD line (Blue) crosses below the signal line (Orange). From this method, we will get an early signal compared to the previous method we discussed. This will give us better and accurate results.
Continue reading below.....
Comment:
So now I hope you understood all the three methods of the MACD indicators you can use to trade crypto. This is the positive side of the indicator. Lets look at some of the limitations it has.
Limitations of MACD:
So we know we are using the default MACD setting of MACD line 12-26 days EMA and the signal line of 9 day EMA, but to avoid some false signals, some traders increase the period of the signal line, which will reduce the number of crossover signals. The drawback to this move is that, the signals will appear a little later than the price movement compared to a shorter term Signal Line EMA.
We know nothing in this world is perfect, and this is crypto world, so not even a small chance of it. Sometimes, you will get a false signal when the price chart is showing the movement of the price the other way. For this, you will need to develop your own strategy for risk control and targets. I would recommend, if you enter on a false signal, and the price is going the other way, you get out of the trade. Mostly, you will have your stop loss in place just below the support levels hopefully, so that is a safer option. But get use to it, and you will love this indicator.
Combine the three methods we learnt in this lesson and this indicator will be really very helpful.
Please shoot me with questions, if you have any. I am always here to answer them.
Always use this lesson as a reference.
Next week, I will be back with another important topic.
Stay Tuned and Happy trading!
Limitations of MACD:
So we know we are using the default MACD setting of MACD line 12-26 days EMA and the signal line of 9 day EMA, but to avoid some false signals, some traders increase the period of the signal line, which will reduce the number of crossover signals. The drawback to this move is that, the signals will appear a little later than the price movement compared to a shorter term Signal Line EMA.
We know nothing in this world is perfect, and this is crypto world, so not even a small chance of it. Sometimes, you will get a false signal when the price chart is showing the movement of the price the other way. For this, you will need to develop your own strategy for risk control and targets. I would recommend, if you enter on a false signal, and the price is going the other way, you get out of the trade. Mostly, you will have your stop loss in place just below the support levels hopefully, so that is a safer option. But get use to it, and you will love this indicator.
Combine the three methods we learnt in this lesson and this indicator will be really very helpful.
Please shoot me with questions, if you have any. I am always here to answer them.
Always use this lesson as a reference.
Next week, I will be back with another important topic.
Stay Tuned and Happy trading!
When you have buy signal using the signal line crossover method, make sure to set a stop loss below a recent low price.
The only downside of this method is that sometime, you will see MACD cross over the signal line in a very short amount of time. You can try and avoid this by only getting into trades in the direction of a long-term trend. If the trend is up, take it as a buy signal, and sell it when the next crossover happens below the signal line.
This is pretty simple. Practice will make you more perfect at this. The best way I see you can practice is using very small amount of BTC and trade your favorite volatile coin with high volume. Try it out. It works. Make sure at this point you understand this method very well. If not, feel free to ask me a question in the comment below or in the telegram group. I am always here to help. I want you to read this method again and then proceed once you understand this completely.
Now lets move on to the third and the last method which is divergence method.
3. Divergence
This is very simple. Similar to what we learned about divergence in Lesson 1.
There are two types of divergence:
- Bearish Divergence
- Bullish Divergence
Bearish divergence is when you see the price making new higher highs, but the MACD doesn't do that. Refer to the image below:
So in the image above, I have drawn a trend line on the price chart which you can see is making a higher high, but when you look at the trend line on the MACD indicator, you can see if making a Lower high. That is a bearish indicator. You can clearly see that the price drops significantly after that point. So you can take that as a sell signal, and buy back in when you see another bullish indicator from using any of the three method we learnt.
Now lets talk about Bullish Divergence. Fairly simple.
Bullish divergence is when you see the price chart making new lows, but on the MACD indicator, you see MACD line making Higher Lows. Refer to the image below for a better understanding:
As you can clearly see in the above image, that the price chart is making new lows, but the MACD is making a Higher Low. Thats a bullish indicator, and a clear buy signal. See how the price increased after that? You can ride that until you see a bearish indicator or the MACD line reversing towards the downward side.
Now I know you are thinking that this is easy. It is fairly easy, but it will require a lot of chart analysis, and concentration to practice this. But once you get this, you will thank me. Just kidding, but I'll be happy I could help, if I did at all.