I've always had a question for everyone: How should we use the MACD technical indicator? Today, let's talk about a very powerful and commonly used indicator in the cryptocurrency technical analysis - MACD (Moving Average Convergence Divergence). As an old friend who has been in the crypto space for many years, I've found that many newcomers and even some experienced traders do not have a deep understanding of MACD. Don't worry, today I will explain this 'sophisticated' indicator in plain language and with some vivid metaphors!
What specific confusions have you encountered while using MACD or other technical indicators? Is it not knowing how to interpret golden and death crosses? Or not understanding top divergence and bottom divergence? Or are you unclear about the application of MACD at different cycles? Feel free to raise your questions, and we can discuss them together!
In my trading career, MACD has been like an old buddy. Although it isn't 100% accurate every time (remember, no indicator is a holy grail!), it has indeed provided me with many important insights in judging trends and identifying buy and sell points.
🧐 So, what exactly is MACD?
Composition of the MACD indicator: Two lines and one histogram, understanding the market's 'traffic lights' and 'accelerators'
You can think of MACD as a sophisticated 'market sentiment detector'. It mainly consists of several parts:
DIF line (fast line/MACD line): This line reacts sensitively, like a 'speedboat' in the market. It is the short-term (usually 12-day) Exponential Moving Average (EMA) minus the long-term (usually 26-day) EMA. When the short-term moving average crosses above the long-term moving average, the DIF line will cross above the zero line, and vice versa. It tells you which direction the market momentum is leaning in the short term.
DEA line (slow line/signal line): This line is relatively flat, like a 'cruiser' in the market. It is the simple moving average of the DIF line (usually 9-day EMA). It smooths out the DIF line, helping us filter out some noisy signals and indicating a more stable trend direction.
MACD Histogram: This is the red and green bars we often see. It is the difference between the DIF line and the DEA line.
Red bars (usually representing negative values, or bars below the zero line): Indicate that the DIF line is below the DEA line, with bearish strength prevailing, and the market may be in a downward trend or correction. The longer the bars, the stronger the downward momentum, just like pressing the accelerator deeper makes the car go back faster.
Green bars (usually representing positive values, or bars above the zero line): Indicate that the DIF line is above the DEA line, with bullish strength prevailing, and the market may be in an upward trend. The longer the bars, the stronger the upward momentum, just like pressing the accelerator harder makes the car surge forward more fiercely.
The core usage of MACD: Insight into market 'Golden and Death Cross' and 'Divergence'
Having understood the basic components, let's see how to use MACD, which is the key!
📙 Golden Cross - Buy Reference Signal
Performance: When the DIF line (speedboat) crosses from below to above the DEA line (cruiser), this is usually seen as a buy signal.
Metaphor: Imagine the speedboat accelerating past the cruiser, signaling that a new upward trend may be about to begin, just like the traffic signal changing from red to green, indicating it's time to consider 'stepping on the gas'.
Histogram Performance: At this time, the MACD histogram usually shortens from red bars to green bars (i.e., crossing from below the zero line to above the zero line, or green bars starting to extend above the zero line).
📕 Death Cross - Sell Reference Signal
Performance: When the DIF line (speedboat) crosses from above to below the DEA line (cruiser), this is usually seen as a sell signal.
Metaphor: The speedboat has slowed down and has been overtaken by the cruiser, which may indicate that the upward trend is coming to an end, or a downward wave may be starting, just like the green light turning red, signaling the need to consider 'applying the brakes'.
Histogram Performance: At this time, the MACD histogram usually shortens from green bars to red bars (i.e., crossing from above the zero line to below the zero line, or the red bars starting to extend below the zero line).
Illustration of Golden and Death Cross:
📘 Zero Line Cross - The 'watershed' of trend strength
When the DIF line and DEA line cross above the zero line: When both the fast line and the slow line are above this 'horizontal plane', it indicates that the market as a whole has entered a bullish-dominated area, with a strong upward trend. It's like a boat not only moving fast but also on a smooth sailing route.
When the DIF line and DEA line cross below the zero line: If both lines have dipped below the zero line, it indicates that the market as a whole is under the control of bears, with a downward trend prevailing. It's like a boat not only moving slowly but also in a harsh environment against the wind and current.
📗 Divergence - Early Warning Signal, Expert's 'Secret Weapon'
Divergence is a very important early warning function of MACD, helping us sense potential reversals in trends ahead of time.
Top Divergence (Bearish Divergence) - Indicates potential downward movement
Performance: When the cryptocurrency price continues making higher highs, but the MACD indicator's DIF line or DEA line creates lower highs, not following to create new highs.
Metaphor: It's like a car climbing a hill; on the surface, the front of the car still appears to be going up, but in reality, the engine speed (MACD) can no longer keep up, and the power is fading, indicating that the car may soon 'slide down' the hill. This is a signal of insufficient upward momentum in the market.
Histogram Performance: You may see a new price high, but the corresponding height of the green bar is shorter than that of the previous high.
Bottom Divergence (Bullish Divergence) - Indicates potential upward movement
Performance: When the cryptocurrency price creates a new low repeatedly, but the MACD indicator's DIF line or DEA line creates higher lows, not following to create new lows.
Metaphor: It's like a car going downhill; although the front of the car is still pointing down, the engine speed (MACD) has quietly started to increase, the brake pads (downward momentum) are wearing out, indicating that the car may soon 'bounce back'. This is a signal of weakening downward momentum in the market.
Histogram Performance: You may see a new price low, but the corresponding length of the red bar (absolute value) is shorter than that of the previous low.
Illustration of Top Divergence and Bottom Divergence:
Bottom Divergence
📌 MACD Usage Considerations - Advice from 'Experienced Drivers'
Don't blindly trust a single indicator: MACD is a good tool, but it's not omnipotent. Think of it as one reading on your car's dashboard; you can't just look at the speedometer while driving, you also need to consider road conditions, fuel level, rearview mirrors, etc. Therefore, it should be used in conjunction with other analysis tools such as candlestick patterns, trading volume, support and resistance levels.
Cycle selection is very important: MACD signals on daily charts are relatively stable and suitable for medium to long-term trend judgments. In contrast, MACD on 1-hour or 30-minute charts is more sensitive, suitable for short-term operations, but false signals will also be more frequent. Which cycle to choose depends on your trading style. It's like driving: city commuting and long-distance highway driving require different navigation details.
Lagging: MACD is calculated based on moving averages, so it has a certain lag. It's more about confirming and tracking already occurred market trends rather than accurately predicting the future. Don't expect it to buy at the lowest point or sell at the highest point; that's unrealistic.
Use cautiously in consolidating markets: In narrow range 'washboard' market conditions, MACD's golden and death crosses can become very frequent, easily leading to misleading signals. At this time, it's like a compass malfunctioning in the fog, with reduced reference value.
