Complete understanding of MACD interpretation │ Technical analysis methods usable in cryptocurrency trading

The price movements in the cryptocurrency market are repeating patterns that are surprisingly similar to those of traditional stock markets. They react quickly to changes in supply and demand balance, and individual cryptocurrencies often exhibit price behaviors similar to conventional financial products.

To achieve stable investment results, both fundamental analysis and technical analysis are essential. Among them, the Moving Average Convergence Divergence (MACD) indicator is particularly effective for medium- to long-term investment decisions. This article will provide a detailed explanation from the basics of how to read MACD to practical ways to utilize it.

Basic MACD Interpretation: The Essence of the Market Indicated by Two Lines

The Moving Average Convergence Divergence (MACD) is a powerful technical indicator that combines short-term and long-term exponential moving averages. Its strength lies in calculating the difference between two moving averages on different timeframes, allowing clear insight into the market trend direction.

Its greatest advantage is that it can predict medium- to long-term market movements more accurately without being misled by short-term noise.

Components of MACD:

• MACD Line (Yellow DIFF) = Short-term exponential moving average - Long-term exponential moving average
• Signal Line (Purple DEA) = Moving average of the MACD line
• Histogram (Bar Graph) = Difference between MACD line and Signal line

Practical MACD Interpretation: Golden Cross and Dead Cross

The most important way to use the MACD indicator is to interpret signals when the two lines cross. Although such crossings occur relatively infrequently, they often precede significant market movements once they happen.

Golden Cross: Beginning of an Uptrend

A golden cross occurs when the MACD line (yellow DIFF) crosses above the signal line (purple DEA). This is a strong signal suggesting the start of an upward trend.

For example, on the BTC 4-hour chart on February 28, 2022, a golden cross occurred, and BTC price surged from 38,413 USDT to 45,296 USDT, reaching a weekly high.

Dead Cross: Warning of a Downtrend

Conversely, a dead cross occurs when the MACD line (yellow DIFF) crosses below the signal line (purple DEA). This indicates a warning of the start of a downward trend.

On March 3, 2022, the same BTC 4-hour chart showed a dead cross, and BTC price sharply dropped from 44,346 USDT to 37,222 USDT. Combining such cross analysis with other technical indicators can significantly improve investment decision accuracy.

Setting the MACD: The Meaning of (12, 26, 9)

Most cryptocurrency exchanges adopt the standard MACD setting of (12, 26, 9). This configuration uses a short-term period of 12 days, a long-term period of 26 days, and a 9-day simple moving average of the difference.

This setting is widely accepted because it has historical roots in the traditional stock market, which developed based on a monthly average of 26 trading days.

Many trading platforms also allow users to customize MACD settings according to their trading style and analysis needs.

Histogram Interpretation:

• Above zero → Short-term EMA (12 days) exceeds long-term EMA (26 days) → Upward momentum
• Below zero → Downward momentum dominates → Selling pressure is strong

Divergence: When Price and MACD Send Conflicting Signals

Typically, price trends and MACD indicators tend to move in the same direction. However, during rapid market fluctuations, MACD may fail to follow price movements, leading to divergence between the two. Such divergence is known to be an important precursor to trend reversals.

Bearish Divergence: Limit of an Uptrend

This occurs when prices continue to rise, but the MACD indicator shows a downward trend. It suggests that the trading volume and buying momentum supporting the price increase are insufficient, warning of a potential significant price decline soon. The larger the divergence, the greater the expected drop.

Bullish Divergence: Potential Bottoming

This occurs when prices continue to decline, but the MACD indicator shows an upward trend. It indicates that the market may have bottomed out and that an upward trend reversal could be approaching. Larger divergences are associated with stronger subsequent upward momentum.

Key Points for Investment Strategies Using MACD

While the MACD indicator is extremely useful for cryptocurrency technical analysis, it tends to react slowly to short-term market fluctuations and sudden market events. It is not always suitable for high-frequency trading like day trading.

To maximize the use of MACD interpretation, consider the following:

• Combine with other technical indicators: Using RSI (Relative Strength Index), Bollinger Bands, and others can improve analysis accuracy.
• Check fundamental factors: Consider project developments, partnerships, regulatory trends, etc.
• Understand market sentiment: Social media trends and investor psychology indicators are also important.
• Implement strict risk management: Even with excellent analysis, setting appropriate stop-loss levels and managing position sizes are crucial.

The cryptocurrency market is constantly evolving, with new analysis methods emerging regularly. Mastering the basics of MACD interpretation and continuously learning to adapt to market changes will be key to long-term investment success.