Moving average convergence divergence (MACD) is an oscillating technical indicator. It is often displayed underneath the candle chart and requires visual inspection. MACD is suitable for investors who prefer momentum trading. When using MACD, it requires one to have mental focus to remain steadfast when things are going his/her way and remain patience when targets are yet to be reached.
MACD is generally calculated by subtracting the 26-period Exponential moving average (EMA) from the 12-period EMA. A lot of traders use that for an entry signal and interpret in ways to give them insights into their trading decisions. MACD with 9-day EMA is called the signal line. These lines are plotted together and are helpful for one to analyse the crossovers, divergences, and steep slopes. One can decipher the buy and sell signals by monitoring these lines. When MACD is above its signal line, it is often an uptrend market and vice versa.
The default values for MACD is (12,26,9). Some chartists prefer a more sensitive configuration — MACD(5,35,5). Qidax recommends MACD(12,26,9) on an hourly chart for Bitcoin. The ideal short and long positions can be executed when the MACD lines reach value of ±50. According to the historical data study on Bitcoin, at value of 50, it is very likely the MACD like will reverse.
Case study:
On 9th July 2020, Bitcoin price was around 9440. The MACD line (blue) was above the base line (red). Both lines were above 0, which indicated that the price was on an uptrend. When blue line crossed with red line, it was a signal for short position. The blue was seen to continue declining and the slope became steeper approaching 10th July 2020 when it crossed with the signal line. It meant that the downtrend momentum is increasing. The blue line later crossed the red line approach 11th July 2020. It was an exit signal.
How much we earn from these transactions?
Imagine one short 1 BTC at 9390 and close at 9170, the price decrement of 220 pips would realise profit 0.024BTC, not to mention the advantage of leveraging feature in future contract.
Further notes on MACD
Head and Shoulder pattern can be applied on MACD indicators.
MACD Bullish SHS
Referring to the figure below, the MACD histogram shows an Inverted Head and Shoulders pattern. It is a bullish signal on the right shoulder and marks a reversal — a possible turn to an uptrend.
MACD Bearish SHS
Referring to the figure below, the MACD histogram shows a Head and Shoulders pattern that marks a reversal and a possible turn to a downtrend. A possible entry is made after the pattern has been completed, at the open of the next bar.
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