What is MACD and How to Use It to Analyze the Crypto Market

When investing in cryptocurrencies, understanding technical analysis tools is essential. The crypto market follows the laws of traditional finance, reacting to supply-demand relationships and macro-micro economic impacts. Investors can forecast market conditions more accurately by combining trend analysis, news, and technical indicators based on available data. This article will help you better understand the MACD indicator—a powerful tool for medium- and long-term trading.

How Does the MACD Indicator Work

The MACD (Moving Average Convergence Divergence) indicator is composed of two main components: the fast moving average (12-day EMA, usually shown in red) and the slow moving average (26-day EMA, usually shown in yellow).

The principle of MACD operation is simple: it calculates the difference between these two averages and displays the result as an indicator. When MACD is above zero, it means the 12-day EMA is greater than the 26-day EMA, indicating increasing momentum. Conversely, when it is below zero, momentum is decreasing.

An important feature of MACD is that it is not sensitive to small fluctuations in the short-term market. Thanks to this characteristic, MACD can filter out market noise and provide more accurate forecasts of market trends during long-term investment periods, thereby reducing market volatility risks for investors.

Advantages of MACD

MACD is particularly effective in automatically identifying market trends. It helps investors avoid dangers related to counter-trend fluctuations and allows for accurate prediction of the start and end points of upward or downward phases in medium and long-term.

Thanks to its noise-filtering ability, MACD significantly reduces ambiguity when analyzing the market, helping investors gain a clearer view of the main trend direction without being distracted by temporary fluctuations.

Limitations to Know

Although MACD is a powerful indicator for medium and long-term, it has notable drawbacks. MACD is not very sensitive to sharp market changes and signals often appear frequently. Therefore, it is not suitable for high-frequency trading or scalping.

This means that if you are a day trader or scalper, you need to combine MACD with other short-term indicators to obtain more accurate signals.

Key Crossover Signals

Unlike the Moving Average (MA), which can be combined with candlestick patterns for analysis, MACD works by filtering out the noise of frequent market fluctuations, thus focusing more on analyzing and predicting its own pattern.

###Golden Cross (Golden Cross)

When the fast average (12-day EMA, red color) crosses above the slow average (26-day EMA, yellow color) and moves upward, a golden cross is formed. This is often considered a positive sign, indicating the beginning of an upward trend.

###Death Cross (Death Cross)

When the 12-day EMA crosses below the 26-day EMA downward, a death cross appears. This signal usually indicates an upcoming or ongoing downward trend.

Real-World Example from Bitcoin

Bitcoin’s trading history provides clear examples of MACD’s effectiveness. On February 28, 2022, a golden cross appeared on Bitcoin’s 4-hour chart. Shortly after, BTC price surged from $38,413 to a weekly high of $45,296.

Conversely, on March 3, 2022, a death cross appeared on the 4-hour chart. Bitcoin then sharply declined from $44,346 to $37,222, confirming the negative signal from MACD.

Default MACD Settings (12, 26, 9)

The standard configuration of MACD is (12, 26, 9), which is widely used across most trading platforms. These numbers correspond to 12 days for the fast parameter, 26 days for the slow parameter, and 9 days for the signal line.

This setup originates from the structure of traditional stock markets with 6 trading days per week and an average of 26 trading days per month.

MACD with this setup does not provide much value on 5-30 minute candlestick charts. Instead, it is most effectively applied on 1-hour, 4-hour, and daily timeframes. You can customize the parameters according to personal preferences, but should carefully test before changing the default settings.

MACD Divergence: Hidden Market Signals

In active markets, asset prices fluctuate due to normal oscillations. Although asset prices and moving averages usually move together, MACD may not follow the price trend because of its lower sensitivity to volatility. This creates a divergence between MACD and the actual asset price.

###Peak Divergence

Peak divergence occurs when MACD indicates a downtrend while the candlestick chart still moves upward. This phenomenon suggests that the price increase lacks support from fundamental trading volume, signaling a potential upcoming downtrend. The more pronounced the divergence, the greater the expected market volatility.

###Bottom Divergence

Bottom divergence occurs when MACD shows an uptrend while the market price is falling sharply. This signal often indicates an upcoming upward trend, and the clearer the divergence, the stronger the price recovery prospects.

Conclusion

MACD is an important investment tool in building medium- and long-term strategies. With its ability to accurately identify main trends and filter out market noise, it has proven its value over many years in financial and crypto markets.

However, investors should not rely solely on MACD for short-term trading decisions or during sudden market volatility. To use MACD effectively, it should be combined with current market information, market sentiment, and other short-term technical indicators for a more comprehensive market view.

Disclaimer: Cryptocurrency trading involves significant risks and may lead to the loss of your invested capital. The materials provided are not related to investment advice, tax, legal, financial, accounting, consulting, or any other services and are not a recommendation to buy, sell, or hold any assets. The article only provides information and does not offer financial advice. You should ensure you fully understand the associated risks before investing.