What is MACD? | A powerful tool for cryptocurrency technical analysis

Why the MACD Indicator is Important for Market Trend Analysis

Cryptocurrency price movements tend to follow the same principles as traditional financial markets. Most digital assets, including BTC, react sensitively to changes in supply and demand balance and economic conditions, often exhibiting patterns similar to conventional financial products.

To improve investment decision accuracy, it is essential to develop skills to interpret the market from both technical and fundamental analysis perspectives. Among these, MACD (Moving Average Convergence Divergence) is widely used as an extremely effective tool for understanding medium- to long-term trends.

Currently, BTC is priced at $91.19K, with a 24-hour change rate of +0.73%. Understanding the MACD indicator is a crucial skill for investors to accurately predict such market movements.

How MACD Works: The Relationship Between Two Moving Averages

The Moving Average Convergence Divergence (MACD) is a technical indicator that clarifies market direction by calculating the difference between two exponential moving averages (EMAs) — a short-term and a long-term EMA.

Basic calculation structure:

• MACD Line = Short-term EMA (12) − Long-term EMA (26)
• Signal Line = Moving average of the MACD Line (9)

This indicator is superior to other analysis tools because it effectively filters out short-term noise while accurately tracking medium- to long-term price trends. Investors can discern the true market liquidity and make decisions without being misled by temporary fluctuations.

How to View and Use the MACD

Most trading platforms allow you to select “MACD” from the technical indicators menu on the chart screen, which then displays the indicator below the candlestick chart.

The displayed elements include:

• MACD Line (usually shown as DIFF in yellow)
• Signal Line (usually shown as DEA in purple)
• Histogram (green or red bars visualizing the difference between MACD and Signal lines)

Using chart adjustment tools, you can customize the size of the MACD display area for more detailed analysis.

Advantages and Disadvantages of Using MACD

Advantages

The biggest benefit of using the MACD indicator is that it clearly defines the current market trend and helps avoid trades that go against it. It allows for more accurate prediction of trend turning points, such as the start and end of bullish phases or the development of bearish phases.

Investors can focus on the fundamental price movements without being distracted by market noise, enabling more robust investment decisions.

Disadvantages

On the other hand, because MACD is a medium- to long-term stability indicator, it tends to react slowly to sudden market fluctuations and frequent trading signals. Therefore, it is important to understand that it may not be suitable for high-frequency trading strategies like day trading.

Practical Trading Signals Using MACD

Golden Cross and Dead Cross

The crossing of the MACD Line and the Signal Line is a key signal indicating a major market turning point. Although such crossings are relatively infrequent, once they occur, they often signal the onset of a significant market move. Combining this with other technical indicators enhances analysis accuracy.

Golden Cross occurs when the MACD Line (yellow DIFF) crosses above the Signal Line (purple DEA), strongly indicating the start of an upward trend.

Dead Cross occurs when the MACD Line crosses below the Signal Line, serving as an important warning of a potential downward trend.

For example, on the 4-hour BTC chart on February 28, 2022, a golden cross occurred, and BTC’s price surged from 38,413 USDT to 45,296 USDT. Conversely, on March 3, 2022, a dead cross formed, and the price sharply declined from 44,346 USDT to 37,222 USDT.

Meaning of the Standard MACD Settings (12, 26, 9)

Most cryptocurrency exchanges adopt the MACD (12,26,9) setting as the standard. These values represent a 12-day short-term period, a 26-day long-term period, and a 9-day simple moving average of the difference.

This combination is historically rooted in the fact that traditional stock markets developed based on a 26 trading days per month cycle. Many trading platforms allow customization of these settings to suit individual investment styles.

The MACD histogram fluctuates above and below the zero line. When above zero, it indicates that the short-term EMA (12) exceeds the long-term EMA (26), signaling bullish momentum. When below zero, it suggests bearish momentum dominates.

Divergence as a Signal of Trend Reversal

In normal market conditions, price trends and MACD move in the same direction. However, during rapid market fluctuations, MACD may fail to follow price movements, leading to divergence between the two. This phenomenon often signals an impending trend reversal.

Bearish divergence occurs when prices continue rising while MACD shows a downward trend. This suggests decreasing trading volume and market participation supporting the price increase, warning of a potential sharp decline soon. The larger the divergence, the greater the expected downward movement.

Bullish divergence occurs when prices continue declining but MACD shows an upward trend. This indicates the market may be bottoming out and a trend reversal to the upside could be imminent. Larger divergences often precede stronger upward movements.

Building an Investment Strategy Based on MACD

MACD is a core technical analysis tool in cryptocurrency investing, especially effective for developing medium- to long-term strategies. However, it is important to recognize that it may respond slowly to sudden market changes or unexpected events.

To maximize MACD’s effectiveness, consider integrating the following elements:

• Combining multiple indicators: Use alongside RSI (Relative Strength Index), Bollinger Bands, and other technical tools for more precise analysis.
• Fundamental analysis: Incorporate project innovations, partnership developments, regulatory changes, and other fundamental factors into your investment decisions.
• Market sentiment monitoring: Track social media trends and investor psychology data, which can influence market movements.
• Rigorous risk management: Regardless of analysis quality, setting proper stop-loss levels and managing position sizes are essential.

The cryptocurrency market is constantly evolving, with new analysis methods and trends emerging regularly. Mastering the fundamentals of MACD and continuously improving your ability to adapt to market changes are key to long-term investment success.