Crypto Academy Week 14 - Homework Post for [ @kouba01]. Cryptocurrency Trading with MACD indicator

Hello again my friend @kouba01. Thanks for another class done with care and dedication. As I have said before, the technical classes are one of my favorites because they teach me tools that I can then apply to my trading. Precisely the MACD is one of the best tools I have learned so far.

Let's start.

_{Image edited by me in Powerpoint. Central image taken from ^Source}

1.1- What is the MACD indicator simply?

For me, the MACD Indicator is the Swiss Army Knife of the indicator's world. This indicator blends the characteristics of oscillators and moving averages (EMA) in its design, making it one of the most versatile indicators ever made.

The MACD is actually an oscillator-type indicator that is constructed from two EMA lines below the price chart and a histogram. Through them, we can not only observe the trends but also the momentum or strength of the trends and when a price is overbought or oversold.

1.2- Is the MACD Indicator Good for Trading Cryptocurrencies?

Of course, it is. Originally the indicator was created for stock market charts, however, it works to indicate trends of any price chart that is graphically represented, including cryptocurrencies.

It is so because the indicator is not influenced by the type of asset but by the movement of its price.

1.3- Which is better, MACD or RSI?

There is not one indicator better than the other, but both are different tools that fulfill different functions. Both work, but it all depends on how people use them.

For example, the MACD has more options but is more complex, so it can be effective in the hands of an expert trader. On the other hand, a novice trader may be able to make better use of the RSI, which is simpler to use.

Comparing MACD with RSI is like comparing a manual screwdriver with an electric screwdriver. There is no one better than the other. Both are useful and can be used in different circumstances and by different people with different skills.

2- How to add the MACD indicator to the chart, what are its settings, and ways to benefit from them?

I will show the procedure to add the MACD to the Tradingview chart. All images have been edited by me and taken from my Tradingview account. ^Source

_{1- Access the chart where you want to place the indicator, in my case it is ETH/USD. Then we must click on the "Indicators" icon just where the arrow indicates}

_{2- An Indicators and Strategy window will be displayed. Then in the blank field, we must type "MACD". A list will be presented, select the first one marked with the arrow.}

_{3- When closing the previous window we will be able to see the MACD indicator just below the price chart. To configure its parameters, click on the "settings" icon. This option will allow us to modify the characteristics of the MACD line and the signal line.}

_{4- A window called "Inputs" will be displayed in which we will place the parameters. For the MACD line "fast length=12" and "slow length=26". For the signal line "signal smoothing=9". Finally click on the "OK" button.}

Finally, the histogram is automatically configured depending on the MACD line and signal line values.

The parameters of (12, 26, and 9) were set by default since the MACD indicator was created with daily charts in mind, the most common timeframe in the 1970s. Therefore MACD under these parameters is more beneficial in a 1D timeframe chart.

The values of (12 and 26) correspond approximately to the half-month and one-month EMA. Through the union of these two parameters, we can know the behavior and the trend of the market, since the "fast" parameter 12 will follow the price closely and on the other hand, the "slow" parameter 26 complements the buy signal.

3.1- How to use MACD with crossing MACD line and signal line?

First of all, we must understand that the signal line is nothing more than a smoothed EMA line of the main MACD line.

The relationship between the MACD main line and the signal line will indicate the strength or momentum of a trend.

For example, if we are in an uptrend the MACD line will be above the signal line, the farther away both lines are the stronger the current uptrend is.

If both lines cross and the signal line passes above the MACD line, this means that the uptrend is losing momentum, therefore many traders take this signal as an indication to SELL.

_{STEEM/USD chart, image edited by me, taken from Tradingview ^Source, MACD main line in blue; signal line in yellow.}

On the other hand, if we are in a downtrend the MACD line will be below the signal line, the further apart the two lines are the stronger the current trend is.

If both lines cross and the MACD line passes above the signal line, this means that the downtrend is losing momentum, therefore many traders take this signal as an indication to BUY.

3.2- How to use the MACD with the crossing of the zero line?

To better explain this function I have decided to add to the price chart two additional EMAs (12 and 26) and compare it with the behavior of the MACD. In this way, we will learn how and why the MACD works by comparing it with the use of two EMA which we learned in the last Scalping class from professor @yohan2on.

_{STEEM/USD chart, image edited by me, taken from Tradingview ^Source, MACD main line in blue; EMA 12 line in magenta; EMA 26 line in cyan.}

We can see that when the two EMA lines above approach each other, the MACD main line approaches the ZERO line. That is, as the MACD main line measures the difference between the two EMA moving averages. So, when the EMAs touch each other the MACD main line will mark zero because there is no distance between the EMAs.

On the other hand, when the EMAs separate, the MACD main line moves away from zero up or down depending on which EMA is above the other, thus indicating a possible uptrend or downtrend.

In summary, when the MACD main line crosses the zero line this indicates a change in trend. On the other hand, when the MACD main line moves away from the zero line it indicates a consolidation of the current trend.

If the main line is below the zero line we are in the presence of a downtrend, and if it is above the zero line we are in the presence of an uptrend.

4- How to detect a trend using the MACD? And how to filter out false signals?

Detecting trends with the MACD is quite simple, as we must be guided by the position of the main MACD line.

If the line is above the zero line it means that we are in the presence of an uptrend. If on the other hand, the MACD main line is below the zero line it means that we are in a downtrend.

The farther the MACD line is from zero the more prolonged the current trend can become.

_{Litecoin/USD chart, image edited by me, taken from Tradingview ^Source.}

One way to filter out false signals is by viewing the price chart and indicator at different timeframes. Smaller timeframes are recommended.

For example, if we are looking at a 1-day chart, we can find the case where the MACD indicates a false Bearish divergence. As in the image below where we see that after a Bearish divergence the price of the asset actually continues to rise.

_{BTC/USD 1D chart, FALSE SIGNAL.image edited by me, taken from Tradingview ^Source.}

The false signal occurred around March 15.

To be safe in our trading and to filter out false signals, we go to a lower 4-hour time frame.

_{BTC/USD 4h chart, REAL SIGNAL.image edited by me, taken from Tradingview ^Source.}

At a lower time frame, we notice that the MACD signal is different. This time the line is moving further away from zero, indicating a continuation of the trend.

5- How can the MACD indicator be used to extract points or support and resistance levels on the chart? Use an example to explain the strategy.

The way we will locate buy and sell points, supports, and resistances is through the behavior and crosses of the MACD main line and the signal line.

For example, when we are in an uptrend, the main MACD line will ascend further and further away from zero, until it reaches a maximum point.

Then the MACD line will start a descent and cross the signal line. The crossing point will indicate the selling point.

In turn, the price where the MACD line reached its peak farthest from zero will be our resistance level. This resistance can be used as a stop loss.

_{Litecoin/USD 1h chart, image edited by me, taken from Tradingview ^Source.}

In the opposite case, if we are in a downtrend, the MACD line will move away from zero in a downward direction. The line will peak and then start to move up until it crosses the signal line...

Just the crossing point between the two lines will be our entry or buy point. In turn, the point of maximum descent of the MACD line (peak) will be our support level, which we can also use as stop loss.

6- Review the chart of any pair and present the various signals from the MACD.

Many signals can be obtained on a MACD chart. For this case, I took the SBD/USD pair, which experienced a sudden rise and fall this week.

These were the results for a 1-hour time frame.

_{SBD/USD 1h chart, image edited by me, taken from Tradingview ^Source.}

We started on May 17th in a downtrend that according to the location of the MACD line and histogram was losing momentum. Then the MACD and signal lines cross indicating a buy point at approximately 5USD.

Then the MACD crosses the zero line thus initiating a trend reversal on May 18th.

The MACD line is rising, moving further and further away from zero and the signal line, which confirms an uptrend with a lot of momentum. This signal is supported by the histogram which rises from zero, confirming the strength of the uptrend.

At a certain point, the MACD reaches a peak, right at this peak the price forms a higher high point which we can take as resistance at 15USD level. After this point the MACD and signal lines move closer together until they cross, confirming a selling point.

After the selling point, the MACD declined to cross the zero line on May 21, confirming a new trend reversal.

The MACD line positioned below the zero line continues to fall and move away from the signal line, indicating that the downtrend has a lot of momentum. This signal is supported by the histogram which is falling away from zero.

Finally, the downtrend is losing strength. This is confirmed by the histogram which begins to close at zero line. At the same time, the MACD line approaches the signal line until they crossed and then rises to start a new cycle.

CONCLUSION

We have seen the number of utilities that can have an indicator as versatile as the MACD, however, we should not limit ourselves to think that the crossing of a line with respect to another is sufficient reason to take a buy or sell signal. This type of trading does not usually work.

We should never enter a trade just because we see crossovers or divergences.

These decisions should always be supported with more analytical tools such as price patterns and support and resistance levels. It is also recommended to use the MACD in conjunction with other indicators such as the RSI.

The MACD is a complex tool that requires several hours of practice to be able to be aware of all the signals it can offer.