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Cryptocurrency trading: The MACD indicator helps you know when to buy or sell Bitcoin
There are several indicators when it comes to cryptocurrency trading. We can cite for example the MACD. The MACD indicator, in effect, tells us when to buy or sell cryptocurrencies. One thing is to know the MACD and another is to know how to use it. This article will reveal the best way to use this very simple indicator.
The different components of the MACD
Moving Average Convergence Divergence, also known as MACD, is one of the simplest and most popular indicators used by traders who engage in cryptocurrency trading.
This is a trend following indicator that shows the relationship between two moving averages. To activate it, you must go to the indicators section. Then type MACD and click on the top one. Before we start, we must first know how the MACD works. Unlike some indicators used in cryptocurrency trading, the MACD has 4 components.
1- The MACD line
The MACD line moves faster and is more sensitive to price changes. This is the main objective of the MACD indicator.
2- The signal line
The signal line reacts more slowly to price changes, which makes it look smoother.
3- The histogram
Next we have the histogram which represents the difference between the MACD line and the signal line. For example, if the MACD line crosses above the signal line, the histogram turns green, and if it crosses below, the histogram turns red. The gap between the MACD line and the signal line, also affects the size of the histogram. If the two lines are further apart the histogram becomes larger and if the two lines are closer the histogram becomes smaller.
4-The zero line
Finally, we have the zero line which simply represents the center of the MACD indicator.
The way traders use this indicator to identify momentum is to look at the crossover between the MACD line and the signal line. If the MACD line crosses above the signal line, it indicates that the market is on an upward momentum. On the contrary, if it goes below, it indicates that the market is on a downward momentum.
Traders can also use the size of the histogram to determine the strength of the momentum itself. If the MACD line crosses above the signal line as the histogram expands, this shows us that the upward momentum is building. Similarly, if the size of the histogram decreases, this indicates that the upward momentum is weakening.
Now that we have established that the MACD indicator is based on moving averages why use the MACD indicator and not the moving averages? Let me do a quick comparison. Here we have the MACD indicator which is set to the default values 12 and 26 and here we also have two exponential moving averages which are set to the same values as the MACD which are 12 and 26.
Notice the correlation between the 2 indicators
Whenever we have a crossover on the moving averages, we also have a crossover on the MACD line, but between the MACD line and the zero line. However, remember that what we are looking for in the MACD line is not a zero line, but rather the crossing between the MACD line and the signal line.
As you can see, the crossover on the MACD indicator gave a much earlier entry signal than the crossover on the moving average. This is why in cryptocurrency trading, many people prefer the MACD as a momentum indicator because of its accuracy.
The common mistake traders often make is to use the indicator alone. Why is it a bad idea to use the MACD indicator alone? Sometimes the overall market has a downward trend yet the MACD crosses upward. This is the reason why in cryptocurrency trading you should not use the MACD alone. Because it only shows us short-term momentum. However, as traders, we must also take into consideration the long-term trend.
The simple strategy with a high win rate that I recommend for beginners is to combine the MACD indicator with a long-term trend indicator like 100 EMA.
1- Identify the long-term trend
The first step is to identify the long term trend by looking at the 100 EMA indicator. If the price is above the 100 EMA indicator, it indicates that the long-term trend is up. And if the price is below the 100 EMA indicator, it indicates that the long-term trend is down.
2- Look for MACD crossovers
Once you have identified the trend, the next step is to look for crossovers on the MACD that show the same signal as the long-term trend. In this particular example, we can see that the long-term trend is up, which means we only take signals when the MACD crosses upwards. For your exit strategy, you can place your stop loss on the nearest swing low and set your profit target at 1.5 times your stop loss.
For advanced traders, if you want to get more profits from your cryptocurrency trading sessions using the MACD indicator, you cannot just rely on beginner crossover techniques. Because remember that crossovers tend to only work in trending markets. If the market is in a range, the indicator will give you many false signals. Therefore, if you want to increase your success rate, I recommend using a more advanced version of the strategy, which is to combine the MACD strategy with price action.
Here’s how the strategy works.
1- Choose a time frame
The first step is to choose a time frame. In this case, the 4-hour chart should be used.
2- Identify a key level
The next thing you need to do is identify a key level in that time frame. When there is a price reversal, you can therefore draw a resistance line.
3- Wait for the price to approach the key level
The next step is to wait for the price to approach the same key level again. Once that happens, we expect the price to reverse down. However, just because the price touches a key level does not guarantee that a reversal will occur. Because key levels are not magic, prices can always break the bottom right. It is for this reason that we need to use additional confirmation to ensure that there is real downward momentum when price touches this area.
Now what most traders do is they wait for the MACD line to cross below before going short. However, by doing this, you will notice that the downward movement has already been made and you have entered late. And so a secret trick to get an earlier entry signal is to use 2 time charts simultaneously: the 4 hour chart and the 2 hour chart.
All we need to do is wait for the MACD to cross down into this new, smaller time frame. And so this is where you need to go short. When comparing the entry signals for the 4-hour chart and the 2-hour chart, you will notice that if you had used the 2-hour chart crossover, you would have entered the trade earlier. But if you had used the 4-hour chart crossover, you would have entered later. Even though both trades turned out to be profitable, the crossing of the lower timescale gave us an earlier entry signal.
We can see that prices have fallen and turned back up making this a key support level. Now that prices have returned to this level, we can confirm that there is bullish momentum when prices touch this area.
All we need to do is use the MACD to confirm the bullish momentum while waiting for it to cross to the upside. Once that happens, you go long.
Now let’s go back to the 2-hour chart and apply our exit strategy. For the stop loss, you can place it at the key level and set your profit target at 1.5 times your stop loss. As you can see, this transaction turned out to be profitable. So I just revealed some high win rate MACD strategies that you can use right now.
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This text does not constitute investment advice. Do your own research and only invest the money you can afford to lose.
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