Over the years, I have been navigating the cryptocurrency world for ten years. Looking back, I entered this unpredictable territory with a capital of 1 million, only to lose more than 800,000 in the first three years! The despair and collapse felt like a bone-chilling wind in the dead of winter, striking deep within my soul. Imagine if I had invested that million in real estate; my net worth would have doubled by now, making one sigh! Even more so, my partner almost left me due to this heavy blow.
However, after a painful reflection, I did not sink into despair. After a long period of deep reflection, I vowed to regain my footing and fight again. Although I had countless grievances in my heart, from the fourth year onwards, I resolutely used the remaining 200,000 as a new starting point, accumulating profits step by step, and finally saw the light.
To this day, that initial 200,000 has transformed into over 40 million, with stable returns that are gratifying. Over the long years, I have summarized ten unshakeable rules and a unique trading strategy. Today, I am willing to share these valuable experiences with you all.
I hope those who are wandering and confused in the cryptocurrency world can gain wisdom from this, take fewer detours, and avoid repeating mistakes. Remember, blindly following the crowd and rushing into a wall will come at a heavy price!
Today's words are brief but profound; I hope you savor them and gain insight!
So how to do well in cryptocurrency trading? Once a person enters the financial market, it is hard to turn back. If you are currently losing but still confused and plan to treat trading as a second career, you must understand 'the simplest MACD strategy.' Understanding it thoroughly can save you from many detours; these are personal experiences and insights, I suggest you save it and ponder over it repeatedly!
Without further ado! Let's get straight to the point!
I. MACD is the most commonly used indicator among experts
The role of the MACD indicator in technical analysis is extremely special; it can be said to be an essential part of learning technical analysis. Its importance at least includes the following points.
First, the MACD indicator is the most effective technical indicator tested by historical trends, and it is also the most widely used indicator.
Second, the MACD indicator is derived from the EMA moving average indicator and has a good application effect in grasping trending markets. Trend investors basically refer to this indicator in practice.
Third, the top and bottom divergence of the MACD indicator is recognized as the best 'bottom fishing and top escaping' method, which is an important tool for the concretization of trend theory and wave theory.
Fourth, many seasoned traders have had this experience: when they first entered the field, they began learning the MACD indicator, then gradually discarded it. After a long time of study and comparison, especially after practical verification, they eventually returned to the MACD indicator. This demonstrates the uniqueness of this indicator.
Fifth, the application of the MACD indicator in quantitative trading is also very extensive.
It is precisely because of these advantages that the MACD indicator has become the most commonly used technical indicator among professional traders.
II. The concept and calculation of the MACD indicator
The MACD indicator, or Exponential Moving Average Convergence Divergence (MACD), was created by Gerald Appel and is a technical analysis tool used to track price trends and assess candlestick buying and selling opportunities. This indicator is a common indicator in market software and is known as the 'king of indicators.' As shown in [Figure 1].
The MACD indicator in the cryptocurrency world consists of the DIF fast line, DEA slow line, MACD histogram, and the zero axis, which together form a 'three lines and one axis.' Investors analyze price trends through the crossing, divergence, breakthrough, support, and resistance of these 'three lines and one axis.' The MACD indicator has become a preferred indicator in many market software, demonstrating its wide application and indicating that it is one of the most effective and practical indicators tested by history.
III. The golden cross and dead cross of MACD
"Golden Cross" and "Dead Cross" patterns are extremely important forms in technical indicator analysis. The golden cross pattern, also known as the golden crossover, refers to the crossing of a relatively short-cycle indicator line upward through a relatively long-cycle indicator line (of the same type), often indicating the emergence of a short-term buying opportunity. If the golden cross pattern appears after ①. a short-term rapid decline during a downward trend; ②. a rebound during an upward trend; ③. a consolidation phase during an upward trend, especially when the golden cross appears at a phase low, it serves as a more reliable buying signal.
The dead cross pattern, also known as death cross, refers to the crossing of a relatively short-cycle indicator line downward through a relatively long-cycle indicator line (of the same type), often indicating the appearance of a short-term sell opportunity. If the dead cross pattern appears after ①. a consolidation phase during a downward trend; ②. a rebound during an upward trend; ③. a short-term rapid rise during an upward trend, especially when the dead cross appears at a phase high, it serves as a more reliable sell signal.
After understanding the golden cross and dead cross patterns, we can specifically examine the golden cross and dead cross patterns of the MACD indicator line. The occurrence of golden and dead crosses in different positions reflects different market implications.
Situation 1: Buy point of the low-level golden cross
If the golden cross of the DIF line and DEA line occurs below the zero axis and is far from the zero axis, this golden cross is called a low-level golden cross. Investors can view this golden cross merely as a short-term rebound in price; whether the K-line can form a true reversal still needs to be observed and confirmed with other indicators.
As shown in the figure above:
On August 27, 2019, in the BTC 10-minute candlestick chart, with the price pulling back, a low-level golden cross occurred, followed by a rebound of 200 dollars. Short-term investors can grasp the opportunity to enter the market.
Situation 2: Buy point near the golden cross at the zero axis
If an upward trend has formed, and the golden cross of the DIFF line and DEA line occurs near the zero axis, it is often an excellent buying opportunity for investors.
This is because, after an upward trend forms, a golden cross near the zero axis indicates that the adjustment has completely ended and a new upward trend has begun. If accompanied by a golden cross of the volume line, it indicates that the price increase is supported by volume, making the buy signal more reliable.
Once this buying point appears, investors should definitely not miss it; otherwise, they will miss a significant upward trend.
As shown in the figure above:
On August 19, 2019, at 09:30, in the BTC 5-minute candlestick chart, Bitcoin broke above the 30-day moving average, indicating that the upward trend has initially formed. In the following period, the price almost continuously operated above the 30-day moving average.
On August 19, 2019, at 14:00, the MACD indicator formed a golden cross near the zero axis, indicating that the market is about to experience a significant upward trend. Investors can buy decisively.
Situation 3: Buy point of the high-level golden cross
If the golden cross of the DIF line and DEA line occurs above the zero axis and is located far from the zero axis, then this golden cross is called a high-level golden cross. A high-level golden cross generally appears during the consolidation phase in the K-line's upward movement, indicating that the consolidation has ended, and the K-line is about to resume the previous upward trend. Therefore, once a high-level golden cross appears, it is a good signal to increase positions.
In practice, when an upward trend forms, and the K-line rises slowly and continues for a long period, once the MACD indicator forms a high-level golden cross, it often signals an acceleration in the K-line's upward trend.
Because of this, high-level golden crosses can also be used for wave operations. Investors can use the MACD indicator to continually target upward waves during an upward trend.
As shown in the figure above:
On June 25, 2019, in the BTC 3-hour candlestick chart, Bitcoin's price, in an upward trend, rose again after consolidation, while the MACD indicator showed a high-level golden cross. This indicates that the correction has ended, and the price will resume the previous upward trend. Investors should pay attention to seize this opportunity to increase positions.
Situation 4: Sell point of the low-level dead cross
The low-level dead cross refers to a dead cross occurring at a considerable distance below the zero axis. This type of low-level dead cross often appears at the end of a rebound during a downward trend, thus serving as a sell signal indicating the end of the rebound. At this point, investors who are not in the market should watch and wait; those who are deeply trapped in positions can sell first and buy back later at a lower price to reduce costs.
As shown in the figure above:
On July 14, 2019, in the LTC 3-hour candlestick chart, the MACD indicator of Litecoin showed a low-level golden cross, and the price experienced a slight rebound, followed by a rapid decline.
Immediately afterward, the MACD indicator formed a dead cross below the zero axis, and the K-line began a new round of downward movement. Spot investors can sell positions at the dead cross and then buy back to lower their holding costs.
Situation 5: Sell point near the zero axis dead cross
If the previous market direction has been a downward trend, the crossing formed when the DIF line breaks below the DEA line near the zero axis is called a dead cross near the zero axis. It indicates that the market has accumulated a considerable amount of downward momentum near the zero axis; the emergence of a dead cross signals that the downward momentum is beginning to be released, and the K-line will continue the original downward trend, acting as a sell signal.
As shown in the figure above:
On August 12, 2019, in the BTC 1-hour candlestick chart, the DIFF line of Bitcoin broke below the DEA line near the zero axis, forming a dead cross. This indicates that the downward momentum in the market is starting to be released, signaling a sell; investors should sell decisively, or they will be deeply trapped.
Situation 6: Sell point of the high-level dead cross
The DIF line breaking below the DEA line at a considerable distance above the zero axis is called a high-level dead cross. This type of death cross pattern is sometimes accompanied by a MACD top divergence. It manifests as: during a sustained upward trend, the price continuously reaches new highs, but the MACD indicator's DIF line and DEA line no longer continue to rise or push higher, forming a divergence with the price trend and gradually moving down.
Above the zero axis, when the DIF line crosses below the DEA line, forming a downward crossing trend, it is a death cross and a relatively reliable sell signal.
As shown in the figure above:
On August 23, 2019, in the TRX 1-hour candlestick chart, following a wave of upward movement in TRON, the price continued to create new highs, but the DIF line and DEA line no longer continued to rise, then formed a death cross, signaling a sell.
IV. Divergence between MACD and candlesticks
Divergence is a term in physics describing momentum; in technical analysis, it is a widely used analytical method with a high success rate. In a downward trend, if the price creates a new low but the indicator line does not, it is called bottom divergence, indicating that upward momentum is accumulating, serving as a buy signal. In an upward trend, if the price creates a new high but the indicator line does not, it is called top divergence, indicating that downward momentum is accumulating, serving as a sell signal.
I. Bottom Divergence
(1) Bottom divergence of MACD histogram and DIFF line
The bottom divergence between the DIF line and price refers to when the price creates a new low during a downward trend, but the DIF line does not. This indicates that the decrease in the price is smaller than the decrease in the DIF line, and the upward momentum in the market is continuously accumulating, suggesting that the price is about to stop falling, with a high probability of an upward trend in the near future.
The MACD histogram is the histogram line hidden behind the DIF line, divided into red and green. Its divergence with price is an important application of the MACD indicator, widely used in practice. The bottom divergence between the MACD histogram and price is when the price creates a series of new lows, but the MACD histogram does not follow suit. The upward momentum in the market is accumulating, indicating that the price is about to stop falling, and the probability of an upward trend in the near future is high.
When bottom divergence appears, investors can grasp specific buying points through two methods.
(2) Specific buying opportunities
The divergence between the DIFF line, MACD histogram, and price at the bottom is not a specific time point, but a pattern that appears over a period of time. However, the specific buying time for investors is a specific time point indicating that the price is about to stop falling. Therefore, to grasp the specific buying opportunity, when the DIFF line, MACD histogram, and candlesticks show bottom divergence, investors must combine this divergence with other technical analysis tools to specify the buying point.
First: Histogram color change or MACD golden cross
A color change in the histogram indicates that the upward momentum in the market has begun to gain the upper hand. It generally appears after a 'shortened histogram'; although it may be delayed for a while, it is more reliable. After the bottom divergence appears, if the histogram successfully changes color or forms a golden cross, investors can buy in.
As shown in the figure above:
On August 26, 2019, in the Ethereum (ETH) 15-minute candlestick chart, Ethereum's price created a new low during a downward trend, but the MACD histogram did not create a new low, forming a bottom divergence pattern with price. This indicates that the market's upward momentum is starting to accumulate, and there is a high possibility of the price experiencing an upward trend later.
Immediately after the histogram changes color, these two successive buy signals together increase the reliability of the upward trend, allowing investors to enter when the histogram changes color.
Second: Combine with other technical analysis tools and candlestick reversal patterns
Bottom divergence combined with candlestick reversal patterns, such as 'single needle probing bottom' or 'three red soldiers at the bottom,' is a specific application of the 'multi-indicator combination' principle.
As shown in the figure above:
On August 26, 2016, in the BTC 30-minute candlestick chart, Bitcoin's price created a new low, but the MACD histogram did not create a new low, forming a bottom divergence pattern with price, indicating that the market's upward momentum is continuously strengthening.
Accompanied by the price's downward halt, a buy signal formed with 'MACD histogram and price bottom divergence + candlestick single needle probing bottom.' The price then experienced an upward trend.
II. Top Divergence
(1) The top divergence of the MACD histogram and DIFF line
The top divergence between the MACD histogram and candlesticks refers to when the price creates a new high during an upward trend, but the MACD histogram does not create a new high. This indicates that the downward momentum in the market is accumulating, and the price may fall anytime.
The top divergence between the DIF line and candlesticks refers to when the price creates a new high during an upward trend, but the DIF line does not. This indicates that the downward momentum in the market is continuously accumulating, and the price has a high possibility of experiencing a downward trend next.
(2) Specific selling opportunities
Similar to bottom divergence, in practice, according to the principle of multi-indicator combination, investors can combine the following methods to make sell signals more specific.
First: Histogram color change or MACD dead cross
After the top divergence between the MACD histogram and the candlesticks occurs, if the histogram suddenly shortens significantly, it indicates that the market's downward momentum is beginning to be released. Investors should pay attention to sell in a timely manner. The color change of the MACD histogram indicates that the downward momentum in the market has gained the upper hand, usually appearing after the histogram continuously shortens. If the histogram changes color or a MACD dead cross occurs after the top divergence with the candlesticks, investors should pay attention to exit in a timely manner.
As shown in the figure above:
On August 9, 2019, in the HT 1-hour candlestick chart, Huobi's price created a new high, but the MACD histogram did not create a new high, forming a top divergence pattern with price. This indicates that the downward momentum in the market is constantly accumulating, and the price may anytime experience a downward trend.
Subsequently, the MACD histogram changed from red to green, issuing a sell signal of 'divergence between histogram and price at the top + histogram color change'. Investors should pay attention to exit in a timely manner.
Second: Combine with other technical analysis tools and candlestick reversal patterns
After the top divergence between the MACD histogram and price occurs, if other technical analysis tools also simultaneously signal a sell, the reliability of the market sell signal will greatly increase, and investors should pay attention to exit decisively. Common sell signals of this type include 'divergence between histogram and price at the top + candlestick reversal patterns', etc.
As shown in the figure above:
On July 20, 2019, in the ETH 3-hour candlestick chart, Ethereum's price hit a new high, but the MACD histogram did not reach a new high, forming a top divergence pattern with price. This indicates that the downward momentum in the market is continuously strengthening, and the price may experience a downward trend.
Subsequently, the MACD histogram gradually shortens, while the K-line forms a bearish Evening Star pattern. Investors should pay attention to exit promptly, and afterward, the K-line experienced a significant downward trend.
Appendix:
Evening Star: During the upward trend, a long bullish candle appears first, followed by a shorter candlestick (either bullish or bearish) the next day, which people metaphorically refer to as a star; this is the main part of the candlestick pattern. The third candlestick is a long bearish candle that penetrates deeply into the body of the first candlestick. The Evening Star is a signal of price topping and retreating, and some predict its accuracy rate is over 80%.
V. Modification of MACD parameters
The lagging response to price movements sometimes makes buying and selling prices less than ideal; this is a defect of the MACD indicator. One way to change this situation is to adjust the indicator parameters, making the MACD indicator respond more sensitively to trends, allowing for more ideal buying and selling price points.
In commonly used market software, the default parameters for the MACD indicator are 12/26/9. With such parameter settings, the MACD indicator often has a noticeable lag in response to price changes.
The lagging nature of the MACD indicator can be resolved by adjusting parameters. Commonly used parameter combinations include 5/34/5, 5/10/30, etc. Investors can also try and explore more in practice.
You must understand that this market is filled with countless risks and you must respect the risks. Most newcomers entering this industry during every bull market do so because they hear legends of others becoming rich overnight, who multiplied their wealth by 100 times, and hastily enter the market.
First, you cannot have a profit-first mindset; you should have a risk-first awareness. In other words, understand how much you can afford to lose.
When you start each trade, do not treat this trade as your last one. What if I am very accurate this time, or what if some blogger said, or various indicators suggest that the price will rise next? I can go all-in and be financially free, change my house, change my car. Once I finish this trade, I will stop and not do it again. When you have such a mindset, your position will undoubtedly be very heavy, and once you fail, you will be finished.
No matter how diligent a fisherman is, he will not go out to sea during a storm but will carefully guard his boat. This season will pass, and sunny days will come! Pay attention to the banquet, which offers you both fish and fishing skills; the cryptocurrency world is always open, and only by going with the trend can you have a life of ease. Collect this and keep it in mind!