- September 9, 2017
- Posted by: admin
- Categories: Exchanges, Investing, Markets, Trading
You have been playing around with cryptocurrency for a while now and you just can’t keep your hands away from day-trading. You know about MACD, MACD crossover, RSI and Fibbonacci – what do they do again?
I know exactly how you feel.
It’s all green and it’s going up.
“Should I buy in now or should I wait a bit more and be sure.”
Still going up.
“All right, it’s time to buy in.”
You buy in and it goes into a nose-dive. All red.
Don’t time the market. In theory market timing is very powerful, in practice, it doesn’t work very well. Your only indicator cannot be an emotional prediction based on the upward moving green candlestick. Emotional predictions are just opinions and market doesn’t work that way. For that reason, let have a quick look into one of the ways to benefit from MACD.
How to Trade MACD Crossover Above the Zero-Line?
First of all, MACD stands for Moving Average Convergence Divergence.
MACD is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated subtracting the 26-day (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the “signal line”, is then plotted on top of the MACD, functioning as a trigger for buy and sell signals. – Investopedia
Complicated? Yes, but let’s look behind the curtains and make it more comprehensible.
Based on the most of the information you are going to find in the textbooks or in the web it seems like the MACD should be only used when you have a MACD crossover. A crossover is a crossing point between two MACD lines, as seen below in Figure 1.
Figure 1 (circles)
Everybody knows that a MACD crossover means either buy or sell. In reality, it’s slightly more complicated and we are going to break it down to various aspects so that you know how to trade this very powerful instrument.
When is MACD Crossover More Valid?
A MACD crossover is more valid when it happens above the zero line. As seen below in Figure 2.
Figure 2 (the circle on the left indicates a sell signal and the circle on the right indicates a buy signal.)
That signal is more reliable as opposed to the MACD’s that are trading below the Zero Line. As seen below in Figure 3.
Figure 3 (circles below the center line)
Those are the signals you should pay close attention to. Signals below the zero line are almost always weaker.
Except when the signal comes after a trend break.
Now, this is a bit trickier to see, but it is a meaningful signal. In our case, it’s a buy signal. As you can see in the below figure, the red MACD line indicates a trend crossover below zero line. The green line in the other hand indicates an outside the trendline crossover, which is a very powerful buy signal.
Figure 4 (trendlines)
Pay attention to the price movements during the trendline crossovers (red) – they are not significant moves, there is no strength behind them. It is a completely different story with an outside trend crossover (green).
The first entry point is for the fearless technical gurus followed by a next strong buy signal above the zero line crossover. As you can see MACD reflects the price movements fairly accurately. Notice how volume and RSI are coming along as well.
In short, the proposed MACD (default) concept works the same on all time frames whether it’s 4h, 1h, 30 min, 5 min etc. 4h time frame gives you a possible outlook for the next 4 hours, 5 minute time frame gives you a possible outlook for the next 5 minutes and so forth – you get the picture.
How to Start Using MACD?
My strong recommendation is to play around with the charts, try to react on what you see, and bear in mind that nothing on the market is perfect. It is very easy to read them wrong, and in reality, you never know what’s going to happen next. No one knows.
It is not a game of right or wrong. It is a game of probability of something happening over something else.
For that reason, my strong recommendation number 2 is to always use stop-losses (more in coming articles). Always take your losses early and walk away. Do not get greedy!
The graphics used for this article are real market examples and can be freely found on Tradingview (NEO to USD, 20 – 23rd August 2017 in 1h timeframe).
This should go without saying – You should never trade with funds you cannot afford to lose.