- January 27, 2022
- Posted by: CoachShane
- Categories: Cryptocurrencies, Trading Article
When trading cryptocurrencies, you don’t need elaborate trading indicators or strategies to find success. Using the moving average convergence divergence (MAD) indicator when trading crypto, is a good way to measure the momentum and trend direction of your currency.
The Indicator was developed by Gerald Appel and is an oscillator which uses two EMA’s (Exponential Moving Averages). It measures whether price momentum is up or down using these two different moving averages. You can read more in my MACD Indicator Guide post.
In this article, you will learn how to apply the MACD to trading cryptocurrencies including the two biggest, Bitcoin and Ethereum.
How To Use The MACD Indicator For Crypto Trading
Cryptocurrencies, while they may seem complicated, are open to be traded much the same way as any instrument.
They have a great ability to trend and will at times consolidate. Both market conditions give us excellent opportunities to get involved with the currency.
Most charting packages for Crypto, including Tradingview, will have the indicator as a selection.
I don’t use the histogram, which is just a visual representation of the distance between the slow line and the fast line.
Best Settings For MACD For Crypto
Looking for the best settings for any indicator is a rabbit hole you don’t want to go down. While there may be some validity in having a faster reaction of the indicator to price, the time spent optimizing could be better spent mastering your strategy.
The MACD default setting are:
- Fast line (MACD line) is a 12 period EMA – 26 period EMA
- Slow line (signal line) is a 9 period EMA of the MACD line
My personal use of the MACD is using the settings of the 3/10 oscillator which you can read about here.
Another setting I have used in the past is 8, 17, 9 which is used for multiple timeframe trading to determine the trend direction. That will be covered in this article.
Four Best Ways To Use MACD
There are many who are writing to use the crossover of the MACD for buy and sell triggers for Crypto trading strategies.
The only way I would consider the crossing of the moving averages as a signal, is if it were combined with some type of price action. That would include support and resistance breaking and holding.
In my experience, I find that these are the best uses of the indicator:
- Bullish divergence
- Bearish divergence
- Quick consolidation scan
- Trend direction
Traders will still want to understand price action and not just rely on the indicator.
MACD Strategy – Divergence
How does divergence get created?
MACD will show the momentum of the crypto and we are looking for price to head in one direction, but the momentum in another.
This is usually seen with peaks and valleys in the indicator but can also be seen with the slope of the lines.
Bearish Divergence Strategy – Bitcoin
Price is putting in a higher high while the MACD is showing weak momentum as it is heading to the downside. We even see the fast line has crossed under the signal line. There is no mistake that there is a divergence between the direction of price and the momentum of price.
Using a simple trend line break as part of the divergence strategy, we would either short Bitcoin or exit some of our position. When using trend lines, it is vital that you have rules that dictate how you draw them. You can read this article on trend line drawing rules to see my approach.
You can enter the trade short on close of the candlestick or upon the break of the trendline. Some conservative traders may wait until the support level is broken before entering.
Bullish Divergence Strategy – Ethereum
I know some traders like to trade shorter time frames and this example is a recent four hour chart of Ethereum with a bullish divergence trade example.
Not a perfect example but understanding the concept is important.
Price puts in a lower low while the MACD is showing momentum to the upside. A simply trend line break gives you a trade entry.
Those that use a stop loss in crypto and not just buying/holding, could use the extreme of the low candlestick for a simple stop placement.
Crypto Consolidation Strategy
Markets trend and consolidate. While trading in consolidations is risky, all trends start with a breakout from a trading range.
Using the MACD, we can quickly scan a chart to see if the momentum is showing the potential of a trading range forming. This will sometimes show up on the indicator before price makes it clear.
This is Litecoin.
Looking at the MACD, you can see the lines are wrapping around each other. You can see the indicator was showing consolidation before confirming with price. I put the MACD histogram back on so you can get a better visual of the distance between the lines.
A trader could buy the breakout, wait for a pullback on a lower time frame, or position inside the range itself. There are many ways to trade this and the best way, is one that fits you.
Digging a little deeper with this example……
While not a complete breakout trading tutorial, you can see price has a support level inside the range (dashed line). Price is also ranging near resistance zone of the larger range. Traders can position inside the range when price action give opportunities. Your position is then carried to profit by breakout traders.
In this example, because of the support inside the larger range, traders can use that for their protective stop placement.
Higher Time Frame Trend
When I first started trading, I actually began looking at Fibonacci. While I no longer consider it as a strategy, I did pick up a great tip.
Using the MACD on a higher time frame and trade in that direction on a lower time frame. For instance, trade the weekly trend on the daily chart.
The settings are a little different: 8, 17, 9. You can see those are a little faster than default settings. That makes sense as a slower MACD will give up a lot of price movement before the weekly changes trend.
The chart on the left is a weekly chart using the different settings. On the right, the daily chart using our default settings.
The black circle highlights the MACD line (blue) crossing the signal line (orange) to the downside. This indicates that trades on the daily chart should be short trades only.
The daily chart has several standard price patterns shown: a rally (mean reversion) and trading ranges. While not an example on this chart, we would only be looking for bearish divergence on the daily chart.
Day Trading
I wanted to show another example of using the higher time frame trend.
This is a 30 minute trend on the left, and the right is a 5 minute trading chart.
I didn’t add any labels to these charts as I’d like to give you a start on seeing things for yourself.
As a hint, I did use dashed lines to show the trend direction changes on the left chart and where they match up the five minute chart.
Another hint, there were great trades in both directions using simple chart patterns.
Conclusion
While there are no best settings for any technical indicator including the MACD, that does not diminish the usefulness of the indicator.
You learned about trading with divergence which can either be used for trend reversals or just the reversal back in the direction of the current trend.
Cryptocurrencies consolidate like any other instrument and the MACD can alert you early in the consolidation. Having a way to trade that market condition is vital.
Using the higher time frame trend as the direction of smaller time frames is a viable approach.
You don’t need complexity to trade. Just using simple trading patterns along with a measure of momentum can produce some decent sized gains.
Feel free to expand on the strategies presented here for your own crypto trading with the MACD.
