MACD: Why are so many traders using this indicator?

If you trade in the crypto space, you’ve definitely heard of the name MACD. This indicator became popular because it can help you spot signals early, even before the price trend fully unfolds. But to really use it effectively, you need to understand its principles and the common pitfalls.

What exactly is MACD? The power of its three components

MACD (Moving Average Convergence Divergence) is essentially a system used to track an asset’s momentum and trend strength. It works through three components working together:

Part 1: MACD Line (usually shown as the blue line)

This line is the difference between two exponential moving averages (EMA). The standard setup uses a 12-period fast EMA minus a 26-period slow EMA. Simply put, it measures the distance between short-term and long-term price movements. The larger this distance, the stronger the momentum.

Formula: MACD = EMA(12) − EMA(26)

Part 2: Signal Line (usually shown as the red line)

This is the 9-period EMA of the MACD line itself. Think of it as a “smoothed” version of the MACD line, used to generate trading signals.

Formula: Signal line = EMA(9) applied to MACD

Part 3: Histogram (bar chart)

This visualizes the difference between the MACD line and the signal line. The higher the histogram, the greater the divergence between the two lines, indicating a stronger trend.

Formula: Histogram = MACD line − Signal line

Four methods to interpret signals

( 1. Crossovers (the most direct signals)

When the MACD line crosses above the signal line, it’s a bullish signal. Why? Because it indicates that short-term momentum is surpassing long-term momentum, suggesting a price rally.

Conversely, when the MACD line crosses below the signal line, it’s a bearish signal. At this point, short-term strength weakens, possibly leading to a pullback.

) 2. Zero line position (to judge the overall trend)

• MACD above zero: Indicates that the 12-period EMA is higher than the 26-period EMA, and the market is in an uptrend.
• MACD below zero: Indicates that the slower average is higher, and the market is in a downtrend.

This position is especially important because it tells you the current major trend.

3. Divergence (the most easily overlooked but powerful signal)

Divergence occurs when the price and MACD move in opposite directions, often signaling a trend reversal.

Classic bullish divergence: Price makes a new low, but MACD does not. This suggests weakening selling pressure and a potential rebound.

Classic bearish divergence: Price makes a new high, but MACD does not. This indicates waning upward momentum and rising downside risk.

Besides classic divergence, there are hidden divergence (indicating trend continuation) and extended divergence (common in sideways markets), but classic divergence is the most commonly used.

4. Intensity changes in the histogram

Watching the histogram grow larger indicates strengthening trend. If the histogram shrinks or shifts from positive to negative, it suggests momentum is waning. This is very helpful for confirming signals’ reliability.

How professional traders adjust MACD parameters

The standard 12-26-9 setup suits most situations, but can be fine-tuned for different market environments:

In highly volatile markets: Use 5-13-8 parameters for faster response.

In stable markets: Use 21-55-9 parameters to reduce false signals.

Choosing parameters depends on your trading timeframe and asset characteristics. Short-term parameters are suitable for day trading, while longer-term ones fit medium to long-term holdings.

Key tips for using MACD effectively

MACD is powerful, but relying on it alone can lead to false signals. Professional traders combine MACD with other technical analysis tools, such as support and resistance levels, volume confirmation, and other momentum indicators. This approach greatly improves entry and exit accuracy.

Especially in sideways markets, MACD can produce “fakeouts,” so be cautious when the trend is unclear. When the market is clearly trending up or down, MACD signals are most reliable.

To profit from MACD, the key isn’t just the indicator itself but how you integrate it into your trading system. Next time, we can discuss specific trading strategies based on MACD.