Out of all technical indicators, the MACD may be one of the most effective ones at determining the trend of a given cryptocurrency. Given the volatility of the cryptosphere and the rapid movement of the prices, the MACD is an essential indicator that can often detect when there is a change in trend before other indicators. Even better, the MACD can also give an idea of whether the price is lower than it usually is or if it has appreciated beyond what one could expect.
What Does MACD Stand For?
MACD stands for stands for ‘Moving Average Convergence Divergence’(1).
Different Parts of the MACD
Below, is a picture of the MACD Indicator:
There are three different visuals that you should note:
● Blue Line
● Orange Line
● Histogram (those red lines)
Here’s what you need to know:
● The blue line is the MACD.
● The orange line is the Signal.
● The red lines going up and down in the middle represent the Histogram.
What is the significance of these lines?
Before we get into this, there’s something else that we must look at first.
If you’ve ever used TradingView or any other interface to look at crypto prices, you’ve probably noticed that you have the option to edit your indicator.
Let’s Look at TradingView:
Ignore the bottom two entries:
‘Simple MA (Signal Line)
Let’s instead focus on Fast Length, Slow Length, Source, and Signal Smoothing.
These numbers (9, 12 and 26) are typically the default numbers for these averages in most MACD indicator scripts.
Let’s break down what they mean in a really simple way.
Fast Length and Slow Length both refer to the moving averages.
What Are Moving Averages?
Moving Averages track the average of the price in the last few periods. For example, if I have something that looks at the ‘moving average of the last 5 periods’, it looks at the price for the last 5 periods and averages these 5 prices.
A period is just a unit of time and you have the freedom to determine that unit of time. For example, if you’re looking at a 4-Hour chart, then every period is 4 hours.
So, let’s just break this concept down further:
See that spot on the blue line that we circled? The value of that spot is the average of the last 12 periods.
Huh? Why 12 periods?
Because the MACD (Blue) Line always corresponds with the fast moving average, it is usually twelve (12).
Remember that little chart we showed?
The Signal (orange) line represents the slow length.
See that point on the orange line that we circled? The value of the orange line at that point is determined by taking the average of the last 26 periods.
The “code” for MACD means that this calculation happens automatically, so you don’t have to worry about it.
So What’s the Histogram For?
Crazy enough, this is the simplest aspect of the MACD.
Just to be clear, this is the Histogram below:
Basically when the MACD (blue) line is greater than the Signal (Orange) Line you’ll see the Histogram lines pointing to the north (see below):
The height of those lines corresponds with the distance between the MACD (blue) line and the Signal (orange) Line. The greater the difference in the two values, the higher the lines.
You probably guessed it, but when the lines are pointing south on the Histogram (red lines), that means that the Signal (Orange) Line is greater than the MACD (blue) Line:
The height of those lines corresponds with the distance between the Signal (Orange) Line and the MACD (Blue) Line. The greater the difference in the two values, the higher the lines.
Wait You Forgot Something!
What in the World is Signal Smoothing?
This is a bit more complex of a concept. So, without diving too much off track, the ‘smoothing’ of a signal simply makes it ‘easier’ to read. The technicalities of this aren’t really pertinent to understanding the functioning of the MACD. However, an article that explains this function well can be found here: https://www.mathworks.com/help/signal/examples/signal-smoothing.html?requestedDomain=true
So How is the MACD Used to Determine Prices?
Now that we understand the MACD as an indicator, we can finally get into how one can use it to determine prices.
Generally, whenever the MACD (blue) Line is a higher value than the Signal (Orange) Line, it’s considered to be a buy signal.
Here’s an example below:
Let’s see how this corresponds with the price:
As you can see, the signal (MACD Line > Signal Line) occurred when the price was $6,802. Since then, the price has risen as high as $8,220. Thus, this signal can be a fairly reliable indicator when attempting to determine a good spot to invest.
Conversely, When the Signal (Orange) Line crosses above the MACD (Blue) Line, This Represents a ‘Sell’ Signal.
See the picture before this one to take note of the price drop.
There is one more indicator that can be used!
This one is something that folks in the community rarely discuss, but we find this to be one of the more effective uses of the MACD.
We’ve observed that when the direction of the MACD (blue) Line changes, so does the trend.
While the MACD is extremely effective, it is never prodent to invest in the MACD without consulting multiple other indicators/methods of analyses before making a concrete decision. WIthout doing so, one runs the risk of losing a substantial sum of money. It must be noted that this is by no means meant to be construed as financial advice/recommendations/instructions in any way. This is merely a guide to help you ascertain the many benefits of using the MACD indicator to assist in making your own trades.