Crypto Strategy: Moving Average Convergence Divergence (MACD)
Last Update: October 28th, 2021
The moving average convergence divergence (MACD, pronounced “Mac-D”) is a momentum-based indicator that illustrates the correlation between two moving averages of the same security’s price. Although the moving averages are customisable, the default setting for most MACD derivations is the 26-period exponential moving average (EMA) and a 12-period EMA.
The MACD indicator is graphed as two distinct lines: the MACD line and signal line. The MACD line is calculated by subtracting the 26-period EMA and 12-period EMA; the signal line is a constant 9-period EMA. In addition, a histogram is implemented to monitor the distance between the MACD line and signal line. As price action evolves, this distance increases and decreases, indicating changing market conditions. While not foolproof, this information is useful in identifying trends, rotational markets, and pending reversals.
How Does The MACD Strategy Work?
The MACD is a flexible technical tool that may be used to spot trading opportunities and manage open positions in the live market. Much like traditional moving averages in forex trading, the MACD gives us an inside look at market conditions and the behaviour of price action. Accordingly, the MACD is a powerful tool for timing the market and identifying concrete entry and exit points.
In live market conditions, the MACD trading strategy is relatively simple to use. First, the trading platform automatically calculates and plots all values on a graph. Really, the trader’s only task is to monitor the relationship between the MACD line and the signal line. As in name, the moving average convergence divergence indicator signals two key events:
- Convergence: Convergence occurs when the MACD line and signal line come closer to each other. This suggests that the market is becoming compressed.
- Divergence: Divergence occurs when the MACD line and signal line are moving away from each other. This suggests that the market is trending.
A key element of the MACD occurs when the two lines cross one another. Known as a “crossover,” this event signals that price is changing direction as the MACD line (the “faster” indicator) crosses over the signal line (the “slower” indicator). Upon a crossover taking place, price action is changing direction and possibly forming a new trend.
How Is The MACD Strategy Used In Crypto?
MACD indicators are typically applied to the cryptocurrency markets within the framework of trend-following strategies. They may be used on any timeframe, including intraday, day, or multi-day trading styles. In reality, your success in using the MACD to trade cryptos will depend upon how well you interpret the interaction between the indicator’s two lines.
Fortunately, deriving and reading the MACD isn’t difficult. Software trading platforms automatically calculate all values needed and plot them graphically. The trader is then able to visually determine a crypto’s market behaviour and craft decisions. Below are the basic interpretations of the MACD:
- Buy: It’s time to buy when the MACD line crosses above the signal line.
- Sell: It’s time to sell when the MACD line crosses below the signal line.
- Wait: It’s best to wait for further evidence when the MACD line and signal line are close together. Also, periods featuring frequent crossovers require additional patience.
To illustrate how the MACD works, take a look at the Bitcoin (BTC) daily chart below. As you can see, on 20 March 2021, the MACD line crosses beneath the signal line. Now, the decision is simple: sell BTC. Although the market is in a long-term uptrend, there is a reasonable chance at successfully catching a retracement.
Things To Watch For When Trading Crypto With The MACD
Of course, no crypto trading strategy is fool proof and the MACD isn’t any different. In order to be successful, you must apply its parameters consistently within the live market. The key to accomplishing this task is to understand the following concepts:
- Trend Following: First and foremost, the MACD is designed to be a trend trading indicator. Accordingly, its strongest applications will be in spotting new trends and entering existing trends. One of the ways in which the MACD is especially useful is within the implementation of multiple time frame analysis. By applying the MACD to long-term, intermediate-term, and intraday charts, you can get a good idea of how micro price action fits into the broader, macro market direction. In this way, it is possible to fine-tune market entry on an existing trend or get in on a budding trend early. Although a higher risk strategy, the MACD may also be used to trade market reversals. Of course, a market reversal is simply a shift in the prevailing trend; the MACD can offer potential entry and exit points on reversals, which may lead to exceedingly positive risk vs reward scenarios.
- False Signals: Perhaps the greatest drawback to trading the MACD is the indicator’s propensity to generate false signals. A false signal is one that misleads the trader, often prompting the execution of a losing trade. During periods of quiet price action, compression, or rotation, the MACD line and signal line cross one another more frequently. This phenomenon causes a myriad of problems as the sideways price action produces an abundance of false signals. Unfortunately, the trader ends up constantly entering and exiting losing trades, as the market has neither a bullish nor bearish bias. The result of the process is a loss of capital due to transaction costs and constantly being stopped out. Before using the MACD, be sure that you are targeting an active cryptocurrency market. Amid slow price action, as we saw in Ripple (XRP) throughout the summer of 2020, trading the MACD can be a challenge.
- Risk Management: As with any trading strategy, it is imperative that you employ proper risk management principles with the MACD. Practicing solid risk management not only protects your risk capital, it furnishes you with the ability to trade for a longer period of time. No longer will your profit and loss be a product of chance; managing risk aggressively ensures that you will be able to take a higher volume of trades, thus establishing a verifiable track record. This is extremely important in the volatile cryptocurrency markets, as a swift crash or rally won’t destroy your trading account. While MACD strategies can be a viable long-term approach to the market, they aren’t infallible. Limiting leverage, reducing stops, and not overtrading are three ways that you can avoid falling victim to a bad run of luck.
Predicting Crypto Prices With The MACD
If you’ve ever traded forex, shares, or futures, then you know how difficult it can be to accurately forecast price action. Crypto price prediction is no different. A multitude of factors influence price on a minute-by-minute basis, making it a challenge to estimate how the market will evolve. However, the MACD indicator can help.
When forecasting crypto prices with the MACD, it’s important to think in broad terms. As the MACD line crosses above the signal line, price is likely going higher; if the MACD line crosses below the signal line, price is likely going lower. As the distance grows between the MACD line and signal line, the market is trending; as the distance shrinks, a bullish or bearish reversal grows increasingly probable.
Pros And Cons Of The MACD
|
Pros |
Cons |
|
Readily adaptable to any timeframe or cryptocurrency asset |
The MACD is not a leading indicator and can generate inaccurate data in fast-moving crypto markets |
|
Excels in the volatile trading conditions local to most cryptocurrencies |
During periods of range bound crypto trade, false signals are common |
|
Easy to use in fast-moving, turbulent crypto markets |
Whipsaw market conditions can undermine the MACD’s trend-identifying efficacy |
Common Mistakes To Avoid When Using The MACD
Unfortunately, there are a few pitfalls of using the MACD. Be sure to recognise these issues and work to remedy them when trading this strategy in the live cryptocurrency markets:
- Ignoring Market State: It’s important to recognize whether a market is moving directionally or sideways. Remember, sideways markets are not ideal for the MACD.
- Too Much Leverage: Just because the MACD suggests that a buy or sell is warranted, doesn’t mean it’s appropriate to over-leverage a position. MACD signals aren’t infallible ― always use proper position sizing and leverage!
- Inconsistency: Taking the “human element” out of trading the MACD is critical to success. Many crypto traders use the indicator inconsistently ― if you’re going to trade the MACD, integrate it into a comprehensive trading plan.
Get Started!
If you’re looking for a user-friendly way of trading cryptos, then the MACD may be just what you’re looking for! It’s easy to configure and is available on most software trading platforms. Simply add the MACD to your cryptocurrency chart, evaluate the data, and begin crafting trading decisions. As long as solid risk-management parameters are consistently adhered to, the MACD strategy is a viable way of engaging today’s cryptocurrency markets.
About the author
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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