Moving Average Convergence Divergence (MACD) Definition
MACD, also known as Moving Average Convergence Divergence, is a widely-used indicator for technical analysis in trading. It is designed to gauge momentum by showing the speed and direction of a crypto assets’ price movement. MACD consists of two lines– the “MACD line” and the “signal line”, and a bar graph known as the “histogram”, used to identify potential buy and sell signals.
Moving Average Convergence Divergence (MACD) Key Points
- MACD is a momentum oscillator that fluctuates above and below zero.
- The MACD line is calculated by subtracting a longer-term Exponential Moving Average (EMA) from a shorter-term EMA.
- The signal line is a smooth version of the MACD line, derived from another EMA of the MACD line.
- The histogram represents the difference between the MACD line and the signal line.
- MACD generates buying or selling signals when the MACD line crosses the signal line.
What is Moving Average Convergence Divergence (MACD)?
Measurement of momentum is a key part of MACD. The term “Moving Average Convergence Divergence” is a reflection of changes in strength, direction, momentum, and duration of a trend for the price of a cryptocurrency.
Why is Moving Average Convergence Divergence (MACD) Important?
Traders look at the MACD to determine buy and sell signals, allowing for beneficial trades. It helps to identify possible entry and exit points when the market is volatile. Also, it is paramount in suggesting possible trend reversals – moves that are often profitable if accurately foreseen.
When to Use Moving Average Convergence Divergence (MACD)?
MACD should primarily be used in trending markets as it is far more effective. It is not as useful when markets are range-bound or choppy. It is especially advantageous in volatile markets where fast decision-making is required to capitalize on rapid changes in price.
How is Moving Average Convergence Divergence (MACD) Calculated?
The calculation for MACD involves subtracting a cryptocurrency’s 26-day Exponential Moving Average (EMA) from its 12-day EMA. This creates the MACD line. Next, a 9-day EMA of the MACD line, referred as the “signal line,” plots on top of the MACD line, which helps identify buying or selling opportunities.
Understanding the Moving Average Convergence Divergence (MACD) Charts
On a MACD chart, when the MACD line crosses above the signal line, it generates a bullish signal suggesting that it might be an optimal time to buy. On the contrary, if the MACD line crosses below the signal line, it’s a bearish signal indicating that it could be an ideal time to sell.
