The MACD (Moving Average Convergence Divergence) is a technical indicator developed by Gerald Appel in the late 1970s and is widely used in cryptocurrency and stock trading. It is one of the lagging indicators that derive signals from past price movements to identify trends, their strength, and potential reversal points.
The MACD is based on two exponentially moving averages (EMA) of different periods – usually 12 days (short-term) and 26 days (long-term). The difference between these two lines results in the so-called MACD Line. To smooth the signals, another 9-day EMA is calculated from this MACD Line, known as the Signal Line.
The indicator thus consists of three components:
MACD Line: Shows the difference between the 12-day EMA and the 26-day EMA, representing trend strength.
Signal Line: A 9-day EMA of the MACD Line, provides entry and exit signals.
Histogram: The difference between the MACD Line and the Signal Line, visualized as a bar chart, indicates the intensity of price movement.
Main signals in the MACD:
Buy Signal: When the MACD Line crosses the Signal Line from below to above, it indicates a beginning upward trend.
Sell Signal: If the MACD Line crosses the Signal Line from above to below, it signals a potential downward trend.
Divergences:
If the price makes new highs or lows, but the MACD does not follow, it is a warning signal for a potential trend reversal (e.g., bullish divergence when the price falls but the MACD rises).
The histogram enhances visual interpretation: if the bars grow, the trend intensifies; if they shrink, the trend loses strength. This combination makes the MACD a versatile tool that combines trend-following with momentum indicators.
The MACD is often used in conjunction with other indicators, such as the RSI (Relative Strength Index), to confirm trading signals and reduce false signals. Due to volatility, cautious application is recommended, as the MACD sometimes provides lagging signals.
In summary, the MACD allows for a better understanding of current market sentiment, shows potential buying and selling points, and helps traders assess the momentum of price movements in cryptocurrencies.