The Moving Average Convergence Divergence (MACD) is a popular momentum indicator used in technical analysis. It consists of two lines: the MACD line and the signal line, along with a histogram that represents the distance between them. MACD helps identify changes in momentum, trend direction, and potential buy or sell signals in the cryptocurrency market.
The MACD line is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. A nine-day EMA of the MACD line is called the signal line, plotted on top of the MACD line. These lines oscillate above and below the zero line, indicating the relationship between short-term and long-term price trends (see image below).
When the MACD line crosses above the signal line, the indicator is considered bullish. Conversely, when the MACD line crosses below the signal line, the indicator is considered bearish.
The following crossovers may be helpful, but they are not always reliable. It is also important to check where they occur in the chart to lower the potential risks. For example, if the crossover shows a buy signal, but the MACD line indicator remains below the zero line, the market conditions could still be perceived as bearish. In contrast, if the crossover shows a sell signal, but the MACD line indicator stays above the zero line, the market conditions are still likely to remain bullish.
The MACD histogram represents the difference between the MACD line and the signal line. It helps traders visualize market momentum. Positive histogram bars indicate that the MACD line is above the signal line and that bullish momentum is increasing. Conversely, negative histogram bars indicate that the MACD line is below the signal line and that bearish momentum is increasing.
Crypto traders often use the MACD indicator to identify trend reversals, with crossovers between the MACD line and the signal line signaling potential shifts in market direction. Additionally, the MACD histogram can help gauge the strength of market momentum, with histogram bars indicating its direction in the current trend. Moreover, divergences between the MACD indicator and price action may indicate potential trend changes.
Learn more: MACD Indicator Explained.