Beginner’s Guide Part 2
Basic Moving Average Convergence Divergence (MACD)
A MACD is also a trend following indicator that shows the relationship between 2 moving averages. If you haven’t read our part 1 guide about moving averages, please click the link here.
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So let’s say you’ve added the MACD indicator to your chart, there’re 4 components you have to get to know about it. First is the 2 lines you can see in the picture above, the BLUE line is the MACD line, then the ORANGE line is the SIGNAL line. Then we have the Histogram, which represents the differences between the MACD line and the SIGNAL line.
When the MACD line crosses above the SIGNAL line, the HISTOGRAM will turn GREEN.
On the flip side, if the MACD line crosses below the SIGNAL line, the HISTOGRAM will turn RED. The gap between the MACD line and the SIGNAL line also affects the size of the HISTOGRAM.
The last one is the Zero line, which represents the center of the MACD indicator.
How to use MACD in your trading?
Usually, we need to learn to identify the momentum crossover between the MACD line and the SIGNAL line. Here are some examples:
If the MACD line crosses above the SIGNAL line, it indicates the momentum is going upwards, which means it’s better to make a LONG trade.
In the flip side, if the MACD line crosses below the SIGNAL line, it indicates the momentum is going downwards, which means it’s better to make a SHORT trade.
Moreover, you can also utilize the size of the HISTOGRAM to determine the strength of the momentum. If the HISTOGRAM is getting larger, that means the momentum is getting stronger. If the HISTOGRAM is getting smaller in size, that means the momentum is getting weaker.
Combining Moving Averages with MACD
Using MACD itself is not enough to identify the whole trend momentum, it’s advisable to use the MACD indicator with the Moving Averages. Please click the link here if you haven’t read the Moving Averages article yet. So when you combine the Moving Averages strategy with MACD, you’ll have a clearer vision of the overall market trend. When the Moving Averages show the market trend is going upwards, and the MACD line crosses above the SIGNAL line, it’s better to do LONG trades. On the other hand, if the Moving Averages show the market trend is going downwards, and the MACD line crosses below the SIGNAL line, it’s better to do SHORT trades.
Add both indicators in your chart and make demo trades, you’ll get better at implementing these 2 indicators in your trading strategy. Don’t urge yourself to use real money to trade first, learn the basics until you see your demo trades are making good results.
DISCLAIMER: This is just a very basic tutorial that teaches you how to use the indicators and is not financial advice. This article is for educational purposes only, please use it at your own risk. The cryptocurrency market is very volatile and unpredictable. Crypto Brothers will not assume any liability for direct or indirect losses.
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