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MACD indicator: the most comprehensive guide
Regardless of the market, technical analysis is always used in trading in order to find buy and sell signals and be as successful as possible.
One of the most commonly used is the MACD indicator, which helps predict the trend and gives users the ability to read buy and sell signals, as well as identify what is called in trading 'divergences'.
Below we will explain what the MACD indicator is and everything you need to know.
What is MACD indicator?
The Moving Average Convergence Difference (MACD) is an indicator used in the stock market that helps identify changes in the momentum of an asset's price. This indicator is a valuable tool for traders to detect investment opportunities based on the strength and direction of the price trend.
Momentum refers to the speed with which an asset's price changes, and is considered a key technical indicator that measures the strength of price movements.
MACD, on the other hand, measures the difference (convergence or divergence) over time between two moving averages of an asset's price.
To calculate the MACD, two exponential moving averages are used: a short-term moving average (generally 12 periods) and a medium-term moving average (26 periods).
The MACD formula is: MACD=EMA(12)−EMA(26)
Once the MACD has been calculated, its exponential moving average is obtained, usually with a period of 9. This moving average is called a signal and is important for detecting changes in price momentum, generating buy and sell signals.
Both lines, the MACD line and the signal line, are plotted on a histogram. This histogram visually shows the distance between the two lines, making it easier to interpret the convergence and divergence of moving averages and helping investors make informed trading decisions.
How is the MACD indicator calculated?
Two exponential moving averages are used to calculate the MACD: one with a short time period and one with a medium period. Generally, the short moving average uses 12 periods (which can be daily sessions, weeks, months, hours, etc.), while the longer moving average uses 26 periods. The shorter the calculation period, the more sensitive the moving average will be to variations in the price of the asset under analysis.
In other words, the value of the 12-period average is subtracted from the value of the 26-period average, resulting in the difference between the two. Again, we leave you the formula we already saw above:
After obtaining the MACD value, its exponential or weighted moving average is calculated, usually using a period of 9. This moving average is called a signal and is a pattern that identifies a trend in the market.
Both the MACD and the signal are represented graphically by two lines, providing relevant information about the possible future trajectory of the asset's price. In addition to these two lines, a bar chart or histogram is used to show the difference in value at each point in time between the MACD and the signal.
The histogram is presented in different colors according to the relative value of the MACD and the signal:
- Green when the MACD is greater than the signal.
- Red when the MACD is lower than the signal.
Once the different components of this technical indicator are understood, you can proceed to analyze how to use it to obtain buy or sell signals.
What is Moving Average? It is important to understand the MACD indicator
The moving average of a price quote is calculated by averaging the previous quotes over a specified number of periods.
As the number of periods considered changes, the value of the moving average changes. For example, if a 52-session moving average is chosen, the average value of the asset over the last 52 sessions is obtained.
Moving averages can be weighted, which means that more "weight" is assigned to certain sessions, usually the most recent ones, when calculating the average. This allows the average to more accurately reflect current market trends.
How to use the MACD indicator in trading
The trading signals provided by the MACD are obtained by analyzing the crossovers between the MACD lines and the signal, in addition to the values presented by the histogram.
It is important to remember that in cryptocurrency trading (and more) one should not rely exclusively on a single indicator. Although the MACD is a very useful and powerful tool for identifying bullish or bearish trends**, it is ideal to combine its use with other technical analysis indicators, such as oscillators or moving average systems, to get a more complete view of the market.
For example, once conclusions have been drawn using the MACD, they can be contrasted with another index such as the Relative Strength Index (RSI), an oscillator that measures the relative strength of upward movements compared to downward movements.
In the field of oscillators, is also interesting to use the Rate Of Change (ROC), which is based on the price of the asset and serves to measure the rate at which the share price, cryptocurrency or other security changes from one period of time to another.
Another interesting option is to turn to the stochastic oscillator, which also serves to determine when an upward or downward movement in the price of an asset will occur in the market.
The combined use of these tools provides greater breadth in financial analysis. Thus, if the results of two different indicators coincide, the trend of an asset can be corroborated. If the results are inconclusive, it may be necessary to use other indicators and further analyze the market before determining a position.
Combining MACD with other indicators not only strengthens the accuracy of the signals obtained, but also helps traders make more informed decisions and reduce the risk of false signals in their trades.
Advantages and disadvantages of the MACD Indicator
The MACD indicator is widely used because of its reliability and simplicity. It not only shows whether trends are bullish or bearish, but also predicts the strength of such trends and determines buy or sell signals.
However, MACD is a short-term indicator (its broadest measure is 26 days) and it is important to complement it with other technical analysis tools to increase its accuracy.
Advantages
✅ Simplicity and reliability: it is an easy indicator to understand and use.
✅ Trend strength and turning point: it not only indicates the direction of the trend, but also its strength and possible turning points.
✅ Trend Status and Signals: provides information on trends, divergences and continuation signals.
✅ Up-to-date and robust: provides a variety of up-to-date and reliable signals in most markets.
✅ Buy and sell signals: indicates not only the direction of the trend (bullish or bearish), but also the strength of the buy and sell signals.
✅ Speed and volatility measurement: it is useful for assessing the speed and volatility of price movement.
Disadvantages
❌ Required add-on (Basic level): must be used in conjunction with other technical analysis tools to improve its accuracy.
❌ Short-term indicator: its analysis is limited to a short period (up to 26 days).
❌ Delayed signal: provides signals once the trend has already started, not before.
What is the line crossover in the MACD indicator?
We have already explained the calculations and uses of the MACD and the signal, but now we will dwell on a fundamental element of these tools: the crossovers between lines.
The crosses between the MACD lines and the signal provide us with information about the direction of the price of an asset, indicating whether it is going up or down. These signals show us the evolution of the price of a stock, currency, ETF or cryptocurrency based on the following assumptions:
- When the crossover of the MACD line with the Signal line occurs from bottom to top, i.e. when the MACD exceeds the Signal, the trend will be bullish.
- When the MACD line crosses the Signal line from the top to the bottom, i.e. when the Signal exceeds the MACD, the trend will be bearish.
The following example within metatrader shows an application of these signals. In this case, a chart of the bitcoin price:
The chart shows two bullish crosses (green arrows) and two bearish crosses (red arrows). As can be seen, in the four crosses depicted, the price trend responded to the signal given by the MACD. In this example, a trader following the signals provided by the MACD would have obtained a positive result in his trades.
However, it is very important to keep in mind that these crossovers do not always determine a trend change on their own. In the long term, it is common to observe small crossovers between the MACD lines and the signal that do not imply a significant change in the trend of the security, as the security may recover its previous price without a change in trend from bearish to bullish or vice versa. These small variations may have a short-term impact, but do not necessarily determine the overall trend.
Therefore, it is important to analyze the market well before being guided solely by the MACD. A clear example is cryptocurrencies, where Bitcoin and other cryptoassets register strong rises or falls in different periods of time, presenting episodes of high volatility. This can lead to confusing signals of trend changes with false alarms.
For example, in 2024 we have seen how the price of Bitcoin has oscillated around $60,000, followed by rises that complicate predicting whether its price will increase or decrease in the near future.
In this regard, we recall the importance of not relying only on one indicator in our analysis and to gather more information by applying different tools, indicators and signals, combining their results to strengthen our strategy.
A common practice to confirm the signal provided by the crossing of the MACD lines is to wait for the histogram to confirm the trend movement. This confirmation is determined by the speed and amplitude of the histogram movement:
- On a bullish crossover, if the histogram grows rapidly in value, the strength of the price movement is confirmed.
- On a bearish crossover, the histogram will be looking for the histogram to decrease rapidly in value to confirm the trend.
To avoid false alarms and to respond only to major trend changes, it is advisable to use the MACD in conjunction with another technical indicator, such as the RSI.
In addition, speaking purely about cryptocurrency trading, other elements beyond the MACD Indicator, such as news and fundamental analysis, must be taken into account.
Frequently Asked Questions about the MACD indicator
- MACD indicator: the most comprehensive guide
- What is MACD indicator?
- How is the MACD indicator calculated?
- What is Moving Average? It is important to understand the MACD indicator
- How to use the MACD indicator in trading
- Advantages and disadvantages of the MACD Indicator
- What is the line crossover in the MACD indicator?
- Frequently Asked Questions about the MACD indicator