A comprehensive understanding of the king of indicators (MACD indicator) and how to avoid being washed out by the main force while riding the main upward trend train [collectible-grade dry goods]
1️⃣ Before the price enters the main upward trend, the main force often conducts washouts to clear floating chips and reduce the cost of lifting. Common washout methods include:
🟧 Suppression Washout
The main force quickly sells part of their chips, causing the currency price to drop rapidly and creating a panic atmosphere. In this scenario, the currency price may experience a significant decline in a short period, leading some investors to mistakenly believe that the market has reversed, prompting them to sell their valuable coins.
🟧 Sideways Oscillation Washout
The main force allows the price to oscillate within a relatively narrow range for a long time, wearing down the patience of investors. Investors holding the coin may choose to sell it in search of other investment opportunities when they see the price stagnating for a long time.
🟧 High Pullback Washout
The main force first raises the price to attract follow-up buyers, and then suddenly lets the price fall. Investors who bought in may panic-sell due to paper losses.
2️⃣ MACD sees through the main force's washout schemes
🟧 Divergence Phenomenon
1/ Bottom Divergence
During a price decline, if the price makes a new low but the MACD indicator's DIF line or histogram does not make a new low in tandem, this is a bottom divergence. This often indicates that the downward trend is about to end, and the main force may be conducting the final washout by pressuring the price.
For example, if the price drops from 10 to 8, then to 7, continuously making new lows, but at this time, the MACD DIF line rises from -0.5 to -0.3, a bottom divergence occurs. This indicates that although the currency price is falling, the downward momentum is weakening, suggesting that the main force may be secretly accumulating, and the currency price is likely to reverse and enter the main upward trend.
2/ Top Divergence
During a price increase, if the price makes a new high but the MACD indicator's DIF line or histogram does not make a new high as well, this is a top divergence.
However, during the washout operation before the main upward trend, the main force may create a false appearance of a short-term top divergence. At this time, it is necessary to combine the position of the currency price and other indicators for comprehensive judgment.
If the price appears to be a top divergence at a relatively low level, but the trading volume shows no obvious signs of significant selling, and other technical indicators do not show clear sell signals, then this may be a method of the main force's washout, aimed at frightening those investors who do not have comprehensive technical analysis.
🟧 Histogram Changes
1/ Green bars shorten but price does not fall
In an upward trend, green bars in the MACD histogram represent bullish strength. When green bars begin to shorten, it is generally considered a signal of weakening bullish strength.
However, if during the washout phase before the main upward trend, the main force may shorten the green bars through a small amount of selling, but the price does not show substantial declines.
At this point, if investors sell their coins solely based on the shortening green bars, they may likely get washed out.
For example, during an upward process, if the MACD green bars gradually shorten while the price only fluctuates within a small range without significant retracement, this may be the main force conducting a washout.
2/ Red bars shorten but price does not rise
In a downtrend, the red bars represent bearish strength. When the red bars shorten, it usually indicates a weakening of bearish strength.
During the main force's washout process, the price may show red bars shortening while the price temporarily does not rise during the low-level consolidation.
This indicates that the main force may be secretly accumulating, and once the accumulation is complete, the price may enter the main upward trend.
🟧 Cross of the DIF and DEA Lines
1/ Secondary Golden Cross
After the currency price stabilizes following a decline, the MACD indicator might show the DIF line crossing above the DEA line, forming a golden cross. If a small increase in price occurs after the first golden cross but then retraces while the DIF line does not cross below the DEA line again, creating a second golden cross, this is known as a secondary golden cross. A secondary golden cross often signals that the price is about to enter the main upward trend, as the main force may have conducted a small-scale washout after the first golden cross, and the second golden cross indicates that the washout has ended and the upward movement is about to begin.
For instance, after a period of decline, the MACD may show the first golden cross, and the price rises from 12 to 13 before retracing to 12.5, but at this time, the MACD forms a golden cross again, and the price rapidly enters the main upward trend, rising to 18.
2/ Refusal of Death Cross
In an upward trend, when the price undergoes a brief adjustment, the DIF line may approach the DEA line, but does not form a downward death cross.
This indicates that the main force is only conducting slight washout, and the upward trend has not changed.
For example, during an upward process, if a slight adjustment occurs and the MACD DIF line quickly approaches the DEA line, but just before crossing, the DIF line pulls away again, and then the price continues to rise, entering the main upward trend.
3️⃣ How to read MACD indicator?
The MACD indicator consists of four parts: the DIF line, the DEA line, the MACD histogram, and the zero line. Each part represents different data obtained from the original chart, designed to provide a deeper yet intuitive interpretation, which is why the MACD indicator was created.
Components of the MACD indicator
Here are some introductions to these four parts:
🟧 MACD Line (DIF Line/Fast Line)
The fast line of the MACD: The MACD line, also known as the DIF line (Differential Line), is the difference between the short-period moving average (12 EMA) and the long-period moving average (26 EMA).
The existence of the MACD line is to analyze short-term price changes. The MACD line or DIF line can be positive or negative. MACD Fast Line = Short Period Average Line - Long Period Average Line
Positive MACD line: Represents that the short-period moving average is greater than the long-period moving average, meaning the short-term average price is higher than the long-term average price, indicating that this financial product is in an uptrend.
Negative MACD line: Represents that the short-period moving average is less than the long-period moving average, meaning the short-term average price is lower than the long-term average price, indicating that the market financial product is in a downtrend.
The MACD line is also called the fast line because it is most sensitive to changes in market prices.
🟧 Signal Line (DEA Line/Slow Line)
MACD's Slow Line
Simply put, the signal line (slow line) is the average value of the MACD line over a period of time (generally 9 days).
Because it is analyzed based on past MACD data, it is also known as the slow line.
The existence of the signal line is to capture more long-term trends.
Signal Line/Slow Line = ∑(n MACD Fast Lines) / n
n = The time period we want to choose
The slow line exists to help traders identify trading opportunities more quickly. This is a key point and knowledge we will learn in the next chapter.
🟧 MACD Histogram (Histogram / Divergence)
MACD's Histogram
The MACD histogram was created to understand the difference between the DIF line and the DEA line. With the histogram, we can clearly see the difference. MACD Histogram = DIF Line - DEA Line
The histogram can also be positive or negative. From these histograms, we can know: Positive histogram: The fast line (DIF line) is above the slow line (DEA line).
Histogram is 0: The fast line (DIF line) is equal to the slow line (DEA line), which is a convergence point.
Negative histogram: The fast line (DIF line) is below the slow line (DEA line).
🟧 Zero Line
As a reference level, distinguishing the fast line and slow line between positive and negative serves as a boundary line, allowing us to more clearly know which area the current MACD data is in.
4️⃣ Usage of the MACD Indicator
The MACD indicator has many uses, the three most common uses are to find the following information through MACD:
🟧 How to use the MACD indicator to observe price trends?
The simplest use of the MACD indicator is to observe trends in financial product trading, with the most common applications including forex trading and stock/currency trading. Trends in trading are divided into two types: upward and downward.
Uptrend: When both the fast line and slow line are above the zero line, the currency is generally in an uptrend.
Downtrend: When both the fast line and slow line are below the zero line, the currency is generally in a downtrend.
🟧 How to use MACD golden crosses and death crosses to find buy and sell points?
Using the MACD indicator to find buy and sell points is one of the most common analytical methods. By identifying golden crosses or death crosses, we can find points to go long or short. The following is a demonstration using EUR/USD as an example:
MACD Golden Cross: When the fast line (blue line) breaks upward through the slow line (orange line) from below, it is called a golden cross and is a good reference for buy or long signals.
MACD Death Cross: When the fast line (blue line) breaks downward through the slow line (orange line) from above, it is called a death cross and is a good reference for sell or short signals.
🟧 How to identify trend reversal points using MACD indicator divergence?
This is the advanced use of the MACD indicator. When the trends presented by the price movement and the MACD indicator are inconsistent, there is an opportunity for MACD divergence to occur. Simply put, the emotions and viewpoints of investors regarding the price trend change, leading them to believe that the price of the financial product does not match its actual value.
The occurrence of MACD divergence serves as a warning and can be divided into two types, providing investors with potential buy and sell signals:
MACD Top Divergence: When prices make higher highs, but the MACD line makes lower lows, a top divergence occurs. This indicates that the upward momentum of prices is weakening and that the market is actually skeptical about the subsequent price increase, so the death cross that occurs after the top divergence can also be viewed as a sell/short signal.
MACD Bottom Divergence: When prices make lower lows, but the MACD line makes higher highs, a bottom divergence occurs. This indicates that the trend of price declines has slowed down, and the current market believes that the subsequent drop might be a good buy opportunity, thus the golden cross after the bottom divergence is considered a buy/long signal.
5️⃣ Comprehensive judgment combining other factors
Although the MACD indicator has some effect in exposing the main force's washout schemes, one should not rely solely on MACD for judgment and needs to consider the following factors:
🟧 Trading Volume
During the washout process, trading volume generally exhibits a shrinking characteristic. If it is a suppression washout, trading volume will increase when the price drops, but not excessively, and will quickly shrink thereafter; if it is a sideways oscillation washout, trading volume will remain at a low level; if it is a high pullback washout, trading volume will expand during the high pull, then shrink during the pullback. When the price enters the main upward trend, trading volume usually expands significantly.
🟧 Current Position of Price
If the price is at a relatively low level, the likelihood of a washout by the main force is higher; if the price is already at a high level and there are some suspicious technical signals, then the possibility of the main force unloading needs to be considered seriously.
🟧 Market Environment
The trend of the overall market has an important impact on individual currencies. If the overall market is in an upward trend, the probability of washouts of individual currencies before the main upward trend is relatively high; if the overall market is in a downward trend, the main force may take the opportunity to unload.
The MACD indicator is one of the powerful tools for investors in the cryptocurrency market. By deeply studying the performance of MACD under different circumstances, combined with trading volume, price position, and overall market environment, investors can effectively expose the main force's washout schemes before the main upward trend and avoid being easily washed out.
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