1️⃣ Before the coin price enters the main upward wave, the main force often conducts wash trading to clean up floating chips and reduce the cost of lifting. Common methods of wash trading include:
🟧Suppression Wash Trading
The main force sells part of their chips, causing the coin price to drop rapidly and create a panic atmosphere. In this way, the coin price may experience a significant drop in a short time, leading some investors to mistakenly believe that the market has reversed, thus selling their valuable coins.
🟧Sideways Fluctuation Wash Trading
The main force lets the coin price fluctuate for a long time within a relatively narrow range, wearing down investors' patience. Investors holding the coin may choose to sell it to seek other investment opportunities if the price does not rise for a long time.
🟧Rising and Falling Wash Trading
The main force first raises the coin price to attract trend followers to buy, then suddenly lets the price fall. Trend-following investors may panic sell due to a paper loss.
2️⃣ MACD sees through the main force's wash trading scam
🟧Divergence phenomenon
1/Bottom Divergence
During the decline of the coin price, if the price makes a new low, but the MACD indicator's DIF line or MACD histogram does not simultaneously make a new low, this is a bottom divergence. This often indicates that the downward trend of the coin price is about to end, and the main force may be conducting final wash trading by suppressing the coin price.
For example, if the price drops from 10 yuan to 8 yuan and then to 7 yuan, continuously making new lows, but at this time, the MACD's DIF line rises from -0.5 to -0.3, a bottom divergence occurs. This indicates that although the coin price is declining, the downward momentum is weakening, and the main force may be secretly accumulating, after which the coin price is very likely to reverse and enter the main upward wave.
2/Top Divergence
During the upward process of the coin price, if the price makes a new high, but the MACD indicator's DIF line or MACD histogram does not simultaneously make a new high, this is a top divergence.
However, during the wash trading operations before the main upward wave, the main force may create a short-term false appearance of top divergence. At this time, it is necessary to combine the coin price's position and other indicators for a comprehensive judgment.
If the coin price appears to have a top divergence at a relatively low position, but the trading volume does not show significant signs of increased selling, and other technical indicators do not show obvious sell signals, then this may be a method of wash trading by the main force, aimed at scaring off investors who do not conduct comprehensive technical analysis.
🟧Histogram Changes
1/Green bars shorten but coin price does not fall
In an upward trend, the green bars of the MACD histogram represent bullish strength. When the green bars begin to shorten, it is generally considered a signal of weakening bullish strength.
However, if during the wash trading phase before the main upward wave, the main force may shorten the green bars through minor sell-offs, but the coin price does not show substantial decline.
At this time, if investors sell their coins solely based on the shortening green bars, they are likely to be washed out.
For example, during the upward process, the MACD green bars gradually shorten, but the coin price only fluctuates within a small range without showing obvious retracement, which may indicate that the main force is conducting wash trading.
2/Red bars shorten but coin price does not rise
In a downward trend, the red bars represent bearish strength. When the red bars shorten, it usually indicates that bearish strength is weakening.
During the main force's wash trading process, there may be a situation where the red bars continuously shorten while the coin price remains flat at a low level, but the price does not rise temporarily.
This indicates that the main force may be secretly accumulating, and once the accumulation is complete, the coin price could enter the main upward wave.
🟧Crossing of the DIF line and DEA line
1/Second Golden Cross
After the coin price stabilizes after a decline, the MACD indicator may show a situation where the DIF line crosses upwards through the DEA line to form a golden cross. If a small rise in price occurs after the first golden cross and then returns but the DIF line does not cross down through the DEA line and forms a golden cross again, this is the second golden cross. The second golden cross is often a strong signal that the coin price is about to enter the main upward wave, indicating that the main force may have conducted small-scale wash trading after the first golden cross, and the second golden cross indicates the end of wash trading and that the lift is about to begin.
For example, after a period of decline, the MACD forms the first golden cross, and the coin price rises from 12 yuan to 13 yuan before retracing back to 12.5 yuan, but at this time, MACD again forms a golden cross, and then the coin price quickly enters the main upward wave, rising to 18 yuan.
2/Reject Death Cross
In an upward trend, when the coin price experiences a brief adjustment, the DIF line may approach the DEA line, but no downward death cross is formed.
This indicates that the main force is only conducting slight wash trading, and the upward trend has not changed.
For example, during the upward process, a small adjustment occurred, and the MACD's DIF line quickly approached the DEA line, but just before crossing, the DIF line pulled away again, after which the coin price continued to rise and entered the main upward wave.
3️⃣How to interpret the MACD indicator?
The MACD indicator consists of four parts: the DIF line, DEA line, MACD histogram, and zero line. Each part represents different data, which are obtained from the original chart, just to allow us to interpret and present the information more deeply and intuitively, so the MACD indicator was born.
Components of the MACD Indicator
Here are some introductions about these four parts:
🟧MACD Line (DIF Line/Fast Line)
The MACD fast line: The MACD line, also known as the DIF line (Differential Line), is the difference between the short-period moving average (12 EMA) and the long-period moving average (26 EMA).
The existence of the MACD line is to analyze short-term price changes. The MACD line or DIF line can be positive or negative. MACD fast line = short-period average line - long-period average line
Positive MACD line: Represents that the short-term moving average is greater than the long-term moving average, which means that the short-term average price of the product is higher than the long-term average price, indicating that the financial product is in an upward trend.
Negative MACD line: Represents that the short-term moving average is less than the long-term moving average, meaning the short-term average price is lower than the long-term average price, indicating that the market financial product is in a downward trend.
The MACD line is also called the fast line because it is most sensitive to changes in market price.
🟧Signal Line (DEA Line/Slow Line)
The slow line of MACD
Simply put, the signal line (slow line) is the average value of the MACD line over a past period (generally 9 days).
Since it is based on past MACD data for analysis, it is also referred to as the slow line.
The existence of the signal line is to capture more long-term trends.
Signal line/slow line = ∑(n MACD fast lines) / n
n = the time period we want to select
The appearance of the slow line is for traders to discover trading opportunities more quickly. This is a key point, and it is the knowledge we will learn in the next chapter.
🟧MACD Histogram (Histogram / Divergence)
The MACD histogram
The MACD histogram was created to understand the difference between the DIF line and the DEA line. With the histogram, we can see the difference more clearly. MACD histogram = DIF line - DEA line
The histogram can also be positive or negative. From these histograms, we can know: Histogram is positive: The fast line (DIF line) is above the slow line (DEA line).
Histogram at 0: The fast line (DIF line) and slow line (DEA line) are level, which is a convergence point.
Histogram is negative: The fast line (DIF line) is below the slow line (DEA line).
🟧Zero Line
As a reference level, it distinguishes the fast line and slow line from positive and negative numbers, serving as a boundary line that allows us to see more clearly where the current MACD data is.
4️⃣Ways to use the MACD indicator
The MACD indicator has many uses. The three most common methods of using it are to find the following types of information:
🟧How to use the MACD indicator to observe price trends?
The simplest way to use the MACD indicator is to observe trends in financial product trading, with common applications including forex trading and stocks, as well as cryptocurrency trading. Trends in trading can be divided into two types: upward and downward.
Upward Trend: When both the fast and slow lines are above the zero line, the coin is generally in an upward trend.
Downward Trend: When both the fast and slow lines are below the zero line, the coin is generally in a downward trend.
🟧How to use MACD golden cross and death cross to find buy and sell points?
Using the MACD indicator to find buy and sell points is one of the most common analytical methods. By identifying golden crosses or death crosses, we can find points for going long and going short. The following chart is an example using EUR/USD:
MACD Golden Cross: When the fast line (blue line) breaks above the slow line (orange line) from below, it is called a golden cross, which is a good reference for a buy or long signal.
MACD Death Cross: When the fast line (blue line) drops below the slow line (orange line) from above, it is called a death cross, which is a good reference for a sell or short signal.
🟧How to find trend reversal points through MACD divergence?
This is an advanced way to use the MACD indicator. When the price trend and the MACD indicator show inconsistent trends, there is an opportunity for MACD divergence to occur. Simply put, investors' emotions and views on the price trend have changed; they believe that the price of the financial product does not match its actual value.
The emergence of MACD divergence is a warning that can be divided into two types, providing investors with a potential buy or sell signal:
MACD Top Divergence: When the price makes higher highs, but the MACD line makes lower lows, it forms a top divergence. This indicates that the momentum of price increase is weakening, and the market actually has doubts about the subsequent price increase, so the death cross following the top divergence can also be viewed as a sell or short signal.
MACD Bottom Divergence: When the price makes lower lows, but the MACD line makes higher highs, it forms a bottom divergence. This indicates that the trend of price decline has slowed down, and the current market believes that the subsequent decline can be repurchased, thus the golden cross after the bottom divergence is considered a buy or long signal.
5️⃣Comprehensive Judgment with Other Factors
Although the MACD indicator has a certain role in seeing through the main force's wash trading scams, it should not be relied upon solely; it needs to be combined with the following factors:
🟧Trading Volume
During the wash trading process, trading volume generally shows a characteristic of contraction. If it is a suppression wash, the trading volume will expand when the coin price is falling, but it will not excessively expand, and will quickly shrink afterwards; if it is sideways fluctuation wash trading, the trading volume will remain at a low level; if it is rising and falling wash trading, the trading volume will expand when the price rises and shrink when it falls. When the coin price enters the main upward wave, the trading volume usually expands significantly.
🟧Position of Coin Price
If the coin price is at a relatively low position, the possibility of wash trading by the main force is higher; if the coin price is already at a high position and some suspicious technical signals appear, then the possibility of the main force unloading needs to be considered.
🟧Market Environment
The trend of the market has an important impact on individual coins. If the market is in an upward trend, the probability of individual coins undergoing wash trading before the main upward wave is relatively high; if the market is in a downward trend, the main force may take the opportunity to sell off.
The MACD indicator is one of the powerful tools for investors in the cryptocurrency market. By studying the performance of MACD in different situations, combined with factors such as trading volume, coin price position, and market environment, investors can effectively see through the main force's wash trading scams before the main upward wave, avoiding being easily washed out.