Today we’ll be talking about MACD and the importance of using this trend-following momentum indicator for determining the entry point. How does it work?
What is moving average convergence divergence (MACD)?
Before jumping in, let’s take a look at the definition of MACD given by Investopedia, “Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. The result of that calculation is the MACD line. A nine-day EMA of the MACD called the “signal line,” is then plotted on top of the MACD line, which can function as a trigger for buy and sell signals. ”
Moving average convergence divergence (MACD) explained
The definition up above sounds a little bit overwhelming, so let’s try to deconstruct it together.
What is a trend-following momentum indicator?
A trend-following momentum indicator is an indicator that shows the strength of the current price’s movement.
While using it, you’re more likely to predict if the price will continue in an upward or downward direction.
The MACD trend-following momentum indicator is used to determine the beginning of that trend.
How to spot an entry point?
The entry point, or momentum, is normally defined by the relationship between two exponential moving averages (EMA).
In order to get the MACD line you need to subtract the 26-period EMA from the 12-period EMA. A 9-day EMA of the MACD line is called a “signal line”.
How to read moving average convergence divergence (MACD)
When MACD crosses above the signal line, it’s time to buy, and vice versa: traders sell when the MACD line crosses below the signal line.
In our pic up above, we can see two lines, the blue one and the orange one. The blue one is MACD, and the orange line is the signal line.
Look closely, and you will see that at 6 pm, or 18-00, the blue MACD line crosses below the orange signal line, also forming a row of red bars on the chart, which is a signal to sell. Indeed, in the next few hours we can see that the price of BTC is going even lower.
Wouldn’t it be cool if we had a trend-following momentum indicator for every situation in life? Is it the right moment to move houses, and what is the trend in the market? Go check with the indicator and get your personal recommendation.
It doesn’t work like that in life, of course, but at least, we can have answers to some questions in trading.
The MACD tool is a trend-following momentum indicator that consists of two moving averages, and depending on how they cross, we can decide on a short or long strategy.