I have been trading cryptocurrencies for 10 years, having profited greatly during the decade-long bull market, faced bankruptcy twice, and now I can support my family through trading, having withdrawn more than 8 million and still holding about 26 million in exchanges. Honestly, I’ve made it through!
Only because blindly sticking to the classic buy and sell rules for moving averages has caused me to almost eat up all my holding profits. The path is simple; firmly doing this kind of trading system will make this system your ATM over time.
The trading system includes a comprehensive system of the trader's trading philosophy, trading signals, risk management, emotional control, and other aspects.
Trading philosophy: The trader’s understanding of the market and trading objectives, such as whether to pursue trend trading, swing trading, or other specific types of trading opportunities.
Trading signals: Specific buy and sell point indicators, such as signals generated through technical analysis indicators (e.g., moving averages, MACD, etc.) or based on fundamental analysis information.
Risk management: Setting stop-loss points, take-profit points, and capital management strategies to ensure losses can be controlled even in unfavorable market conditions.
Emotional control: Maintaining calm decision-making ability, avoiding irrational trading behaviors caused by greed or fear.
Execution difficulties: Including overcoming psychological barriers, strictly following established trading plans, and continuously optimizing and improving trading systems.
Let me share with you the correct usage and attention details of the EMA, a million-dollar value indicator for medium to long-term trading!
1. Indicator overview
The Exponential Moving Average Convergence/Divergence (MACD) is a common technical analysis tool in stock trading, proposed by Gerald Appel in the 1970s, used to analyze the intensity, direction, energy, and cyclical nature of stock price changes to grasp the timing for buying and selling stocks.
The MACD indicator consists of a set of curves and graphs, calculated by the difference between the fast and slow exponential moving averages (EMA) of stock prices or indices at closing. 'Fast' refers to the EMA of shorter time periods, while 'slow' refers to EMA of longer time periods, with the most commonly used being the 12-day and 26-day EMA. When it comes to (from Wikipedia)
Friends who frequently check the market should have seen it; it looks something like this:
2. Principle explanation
To understand how to use MACD, we first need to know what parts MACD consists of.
The above chart shows the MACD for BTC/USDT on a daily basis from Bitfinex.
You can see that the horizontal axis is time and the vertical axis is units. The chart mainly consists of three parts: the blue line, yellow line, and the red bars. Let’s introduce them one by one.
Blue line: DIF
The blue line is the MACD Line, also known as DIF, which represents the difference in the movement speed between the 12-day and 26-day price moving averages, calculated as follows:
We can roughly consider the average closing price over a period as the average holding cost of the market during that time.
Here, EMA(close,12) represents the average closing price over the past 12 days, and similarly, EMA(close,26) represents the average closing price over the past 26 days. The difference between the 12-day and 26-day averages is the DIF. Thus, we can summarize what situations ideally occur:
1. The stock price rises rapidly over a period, with the increase becoming larger, and the average closing price over the last 12 days is greater than the average closing price over the last 26 days. DIF is greater than 0, and the value is increasing, moving further from the zero axis. The market's average holding cost is high, and the amount is considerable.
2. When the stock price rises over a period, but the increase becomes smaller, the average over the last 12 days is greater than the average over the last 26 days. DIF is greater than 0, but the value is decreasing and getting closer to the zero axis. The market's average holding cost is rising, but the amount is smaller.
3. When the stock price declines over a period, with the decline becoming larger, the average over the last 12 days is less than the average over the last 26 days. DIF is less than 0, and the value is decreasing, moving further from the zero axis. The market's average holding cost is decreasing, and the amount is substantial.
4. When the stock price declines over a period, but the decline becomes smaller, the average over the last 12 days is less than the average over the last 26 days. DIF is less than 0, and the value is increasing, getting closer to the zero axis. The market's average holding cost is decreasing, but the amount is smaller.
Red line: DEM
The red line is the Signal Line, also known as DEM, which represents the 9-day average of the MACD Line (DIF), calculated as follows:
That is, it indicates the average change in holding cost over 9 days. Therefore, DEM always fluctuates less than DIF and reacts more slowly.
Thus, we refer to DIF as the fast line and DEM as the slow line.
Bar line: OSC
The red bars represent the MACD Histogram, also known as OSC; OSC represents the difference between DIF and DEM, calculated as follows:
OSC = DIF - DEM
Sometimes, to make it easier to observe, we multiply the difference between DIF and DEM by 2, which increases the height of the bars by two times, enhancing recognition.
OSC represents the difference between today's average holding cost change and the average change in holding cost. What significance does this difference have?
We can reflect the market's rise and fall trends and the strength of willingness through the size and positive-negative situation of this difference. OSC can be considered as the 'acceleration' of price, indicating changes in momentum.
As shown in the figure, through OSC, we can see changes in the short-term trend of the market, thus judging the timing for buying and selling.
3. The two basic methods of using MACD
Now let's understand the two most basic methods of using MACD:
Golden cross and death cross judgment methods;
Bottom divergence and top divergence judgment methods.
Golden cross and death cross
Golden crosses and death crosses often indicate a turning point in a trend and are very important reference indicators for buying and selling. As shown in the figure below:
K-line and MACD comparison chart for BTC
We look at the wave of BTC after it reached $20,000 in December. When DIF crosses DEM from top to bottom, as shown in the first circle at the bottom left of the chart, the blue line crosses the orange line from top to bottom, forming a death cross, and the entire market subsequently enters a downward trend. By February 10, at the position of the second circle at the bottom of the chart, DIF crosses DEM from bottom to top, which means the blue line crosses the orange line from bottom to top, forming a golden cross, and the market welcomes a wave of rebound.
For a death cross, the higher the position, the greater the probability of a downward trend; similarly, for a golden cross, the lower the position, the greater the probability of an upward trend.
Thus, we see that between the two peaks, there are multiple occurrences of DIF and DEM crossing and even intertwining. Due to insufficient height and depth, they cannot form a strong buy/sell signal and are often very short-term market movements, providing little guidance for the trend.
In actual operations, it is essential to pay attention to the height and depth of the crossing position, combining volume and K-line charts for comprehensive judgment. Does it mean that if the depth is shallower than before or the height is lower than before, there is no operation? Let’s look at the judgment method for top and bottom divergences.
Bottom divergence and top divergence
1. What is the bottom divergence phenomenon? The above image:
2017 ETC K-line and MACD comparison chart before the bull market arrives
First, let's discuss the phenomenon: We see that at the left arrow of the K-line chart, the price first falls to the bottom, showing a large volume lower shadow line, then enters a sideways consolidation in the fluctuation zone. Throughout the entire fluctuation zone, the energy continuously shrinks; although there are some fluctuations in volume, it is very weak compared to the trading volume when it first dropped to the bottom, showing a trend of shrinking.
Pay attention to the middle and later groups of arrows in the chart; after experiencing a period of sideways consolidation, the main force attempts to test the bottom for the first time in the middle group of arrows, testing the number of uncertain chips in the market. During this test, both trading volume and momentum increase, but have significantly shrunk compared to before. At the last group of arrow positions, the main force conducts a second bottom test, showing a lower shadow line, and compared to the first bottom test, both momentum and volume are continuing to shrink.
This situation where the price drops but the trading volume and OSC decrease instead is called a bottom divergence.
To further explain the principle: We can imagine that when prices in the market reach a bottom or peak, there is often intense competition between bulls and bears, leading to significant trading volume. When the price continues to drop to lower levels but trading volume and MACD changes decrease each time, we believe the market is stabilizing. The main players are having difficulty absorbing chips during the sell-off, so they are often looking for opportunities to quickly raise the market in line with the overall environment, indicating that a bull market may soon follow.
Therefore, when a bottom divergence phenomenon occurs, the market may have reached the bottom, and it is the time to set up an ambush for entry. (Take note!)
2. Top divergence
The chart shows BTC's two rebounds.
First, let’s discuss the phenomenon: At the first circle on the left, the price recovers to 11230, followed by a pullback that forms a left high right low head and shoulders bottom, so the price rebounds again. However, unfortunately, we see that although the closing price reaches a new height, OSC has clearly dropped compared to before, weakening momentum, and the bulls are unable to continue breaking through, leading to a price drop as BTC falls below 7000, continuing the downward trend. This situation of rising prices but falling OSC is called top divergence.
To explain the principle: Under normal circumstances, the bulls attempt to break through the resistance level during the first rise, but fail, leading to a decrease in market confidence. After a pullback, they accumulate strength for another rise; at this point, the resistance level is stronger. If it is not a breakout rally with high volume, it is difficult to break through the resistance level.
Thus, we believe that when a top divergence occurs, the likelihood of breaking through resistance levels is significantly reduced, which is a strong bearish signal. At this time, stop-loss and clear positions should be executed in a timely manner, and new entry opportunities should be sought.
4. Summary
MACD is one of the simplest and most reliable indicators, and there are two most commonly used methods:
1. Golden cross and death cross judgment methods;
2. Bottom divergence and top divergence judgment methods.
The golden cross and death cross judgment methods are lagging indicators and are less practical; in contrast, bottom and top divergences provide more guidance for bottom fishing and taking profits.
Indicator introduction: EMA, moving average indicator. Here we only share medium to long-term usage, which is very practical and has a high accuracy rate.
Applicable groups: Suitable for spot or low-multiple medium to long-term trading users.
Applicable targets: High liquidity, high market capitalization, meaning large volume and high stability; not suitable for altcoins or small targets.
Applicable cycles: The daily level or above is best, with strong stability; short-term signals should be no less than the 4-hour cycle.
Indicator parameters: EMA21-55-120-200, in bear or bull markets arranged in a bearish sequence (from top to bottom 200-120-55-21) or bullish sequence (from top to bottom 21-55-120-200), the initial signal only looks at the crossing signal of EMA21-55.
Signal judgment: Observe the crossing situation of EMA21 and EMA55 above the daily level; buy on golden cross, sell on death cross, and strictly follow this.
Usage methods and attention details:
1. Buy: Buy when a golden cross is seen on the daily timeframe.
You may not be able to buy at the lowest point, but buy in line with the trend, letting time take care of profits. There are a few points to pay attention to regarding the buying position.
During sideways consolidation, daily golden crosses and death crosses may frequently alternate, resulting in buying and selling losses. However, eventually one side will show a continuation of the midline trend, so even if there are losses, buy and sell signals must be strictly followed to prevent missing trends. To reduce losses, one can wait for prices to retrace close to the moving average after forming golden cross and death cross signals during sideways consolidation before buying, or wait for the moving average to rise close to the average price to buy additional shares. Generally, buying is possible when EMA21 is nearby and above EMA55, with illustrated cases below.
2. Sell: There are two types of sell signals.
1. Sell when a death cross is seen on the daily timeframe or above (this usually results in a certain profit retracement when the mid-term trend is not long).
2. Sell when reaching the predetermined target (this is flexibly adopted based on personal needs and plans; the downside is that it is easy to sell too early during a bull phase).
All of the above are important points and must-have conditions; more details can be referenced in illustrated cases.
In summary, the EMA indicator is used to judge medium to long-term directions and is utilized to capture trend profits; one will never buy at the lowest point or sell at the highest point. Greater profits and methods can be flexibly applied.
The EXPMA indicator forms a golden cross:
Every time the market turns, the cryptocurrency price always captivates the public's attention, and each speculation point is different. The rise in cryptocurrency prices and the arrival of the bull market are what everyone truly longs for and looks forward to.
There is not much to say about the market, but it is important to note that regardless of bull or bear, timely stop-loss and take-profit are crucial for every investor. Avoid greed and impatience; liquidating your assets can secure your ultimate profit. Don’t try to pocket all profits; taking profit when it's good can effectively avoid risks.
Trading must not be emotional; when in a good mood, one may trade recklessly with high leverage, and when in a bad mood, may operate without consideration of costs. This could lead to a catastrophic outcome. In investing, how much profit is secondary; preserving the principal is paramount. If the principal cannot be preserved, then how can one talk about locking in profits or becoming rich quickly? Therefore, today we discuss the Exponential Moving Average (EXPMA indicator) and common K-line technical patterns.
First, let’s take a look at the EXPMA indicator, which is a trend-following indicator using exponentially weighted moving averages. Its construction principle involves averaging closing prices and analyzing the results to judge future price movement trends.
Compared to the MACD and DMA indicators, the EXPMA indicator, due to its calculation formula focusing on the weight of today's (current) market conditions, overcomes the lagging nature of MACD signals in terms of price movements. It also somewhat eliminates the early signaling of DMA indicators in certain situations, making it a very effective analysis indicator.
So, what are the buying and selling techniques for the EXPMA indicator in actual cryptocurrency trading? First, let’s look at the buying techniques:
①, When the EXPMA indicator forms a golden cross, the price reverses and rises; if the trading volume increases, buy;
②, When the EXPMA indicator turns flat or upward, and the price rises above the EXPMA indicator, buy when a bullish line appears;
③, When the EXPMA indicator direction is upward, if the price drops below the EXPMA, and there is an oversold reversal upwards, buy when the price rises more than 4%;
④, When the EXPMA indicator direction is upward, and the price adjusts confirming support, buy when a bullish reversal K-line appears;
⑤, When the EXPMA indicator direction is downward, if the price moves away from the EXPMA indicator, and the price is oversold and reverses upwards, with increased trading volume or a large bullish reversal line appearing, buy.
However, the selling techniques are just the opposite:
①, EXPMA indicator forms a death cross, price reverses and falls, sell;
②, When the EXPMA indicator turns flat or downward, and the price falls below the EXPMA indicator, sell when a bearish line appears;
③, EXPMA indicator direction downwards, price breaks through EXPMA, stagnation reverses and falls, sell when the highs decrease;
④, When the EXPMA indicator direction is downward, if the price rebounds confirming its resistance, sell when a bearish reversal line appears;
⑤, When the EXPMA indicator direction is upward, and the price quickly rises far from the EXPMA indicator, a stagnation reverses and falls, sell.
Of course, all the techniques summarized here are just references. Specific operations need to be evaluated and analyzed based on your investment habits and focuses. After all, the existence of market inefficiencies and individual differences among investors can lead to vastly different results. Moreover, EXPMA is not necessarily accurate and universally applicable. It is essential to note that the golden cross buy-in we emphasize must meet the following conditions:
①, The EXPMA indicator and MACD indicator should resonate;
②, Check if the MACD indicator crosses the zero axis;
③, Check if the EXPMA indicator has formed a golden cross before the MACD indicator crosses the zero axis.
If all the above conditions are met, then you can time your additional buying. If the answer is no, it is better to observe and wait for the right timing to buy.
Risk warning: The method of using the MACD technical indicator is for learning reference only. Technical analysis never relies on a single indicator to judge market trends. If you only use a single technical indicator to predict future market movements, the probability of failure is high. Be aware of the risks.
The market is cruel, so we must hone our skills to survive! Success is not accidental; opportunities are reserved for those who are prepared. Follow the public account (Crypto Philosophy) where a skilled trader who excels in mid-short-term combined swing arbitrage is here. Regardless of market conditions in the future, I will accompany you all the way.
