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MACD Crossover Techniques with other indicators
Intro
The Moving Average Convergence Divergence (MACD) is a recognized indicator suitable for trends and momentum shifts. For the crypto market, this indicator can be convenient for overcoming volatility by adjusting its EMA components, making it susceptible to the fastest movements of the volatile conditions.
Being able to analyze the market based on the MACD properly will require the study and development of various advanced techniques that address trending conditions, price action reversals, and volatility.
In the following sections, we will explore different techniques based on this technical tool and provide practical examples of how traders can use it to build functional strategies and how to integrate it with other indicators.
Trading Strategies With MACD
Strategies based on MACD are one of the easiest but most powerful methods to get into the crypto market. The MACD indicator can provide signals at entry and exit points, confirmations on price actions, spotting reversal moves, and getting good risk-reward ratios, helping to handle risk management concerns.
So, how do traders develop MACD strategies? The best approach for creating a MACD strategy is to focus on the following:
- Trading Plan: Building a trading plan that integrates MACD as an indicator is a must-do step for creating a successful strategy. This plan should address all the possible conditions in the crypto market where the trader can obtain the most convenient signals.
- Identifying the Trend: The MACD is composed of the 12-period and the 26-period EMAs. When the 12-period line is above the 26-period, it is said that MACD is in a positive value and trending up. Conversely, when the 12-period line is below the 26-period, the MACD is in a negative value and trending down.
- Entry and Exit Points: To recognize potential entry and exit points, the trader must analyze line crossovers and divergences.
- Confirmation: Using a second indicator as a confirmation will give the MACD a solid base to rely on. Trades may use price action, chart patterns, and candlestick patterns to empower their strategy.
- Risk Management: Carrying a risk policy is not a minor issue in any successful trading path. That's why Smart trading tools like stop-loss and take-profit are necessary to protect positions, and at the same, this approach will guarantee the assertiveness of the MACD strategy.
Basis for a trading plan using MACD according to risk management
Trying a MACD strategy without a curated trading plan can lead to an incorrect interpretation of the results. A trading plan establishes the rules for a successful application of the MACD strategy, and those rules will guide the execution of trades and the behavior of traders.
The trading plan will help to avoid most of the pitfalls traders can get involved in, like taking false signals and overtrading, especially for crypto markets where volatility plays a role.
After understanding why a trading plan is relevant, you might wonder: what should a trading plan contain?
To answer that question, we can point out the following:
- Market Analysis for Trend Identification: Spotting just a trend may not be relevant for an advanced analysis. Going beyond the technical tool, understanding all the factors affecting the market will give us a more comprehensive picture of the conditions driving the price. Reaching such a level of comprehension will require fundamental analysis, staying up to date with news and events on the cryptocurrency market, and understanding market sentiment.
- Entry and exit points rules based on MACD: The MACD signals rely mostly on line crossovers and divergences. Since the crypto market can be very volatile, setting rules for trade entry and exit in a plan will help get the most assertive opportunities, acting as a filter. Also, the plan can leave room for the incorporation of advanced techniques of confirmation, like integrating the MACD with other indicators or double crossovers and divergences.
- Risk Management Strategy: Establishing rules for handling risk before and during a trade is key for the survival of the capital in the crypto market. Risk strategies should ensure the proper setting of risk-tolerance and position sizing, which will be the basis for finding the best risk/reward ratios according to capital allocation. In the end, the most relevant aspect regarding risk management is protecting the capital, allowing traders who use the MACD to stay in the market even during a losing streak.
Advanced MACD Techniques Integrating Other Indicators
The MACD offers the possibility to apply advanced approaches under the same concepts of divergence and line crossovers. Integrating the MACD with other indicators makes those concepts more sophisticated and helps confirm signals.
Let's decipher some of those advanced techniques on the crossover of the MACD Line (the difference between the 12 and 24 periods EMA) and the Signal Line (9-period EMA).
Double crossover
The double crossover is a technique based on combining the MACD with the Stochastic Oscillator. Known as The Double-Cross Strategy, it consists of the convergence of line crosses between the two indicators.
When the Stochastic identifies overbought and oversold levels in the price at the time that the MACD line is crossing the signal line, a powerful suggestion for a long or short position emerges.
If the MACD line crosses above the signal line, it suggests a long position. Otherwise, crossing below aims for a short position.
Moving Averages and MACD
Moving averages alongside the MACD can confirm trend direction. An upward crossover in the MACD, while moving averages are crossing too, is a powerful signal for a long position.
Volume for confirmation
During an upward crossover, high volume fortifies the bullish signal while low volume may signify a weak breakout. In the other scenario, high volume during a downward crossover hints at selling pressure, while low volume suggests a bear trap.
RSI momentum
Similar to Stochastic, the RSI moves on oversold and overbought levels. For example, a bearish crossover while the RSI is at an overbought level (above 70), can be a signal for a short position.
Practical Applications of MACD for Crypto Trading
Example of a trading plan with a position entry
| Analysis | MACD Signal | Risk Management | Confirmation | Entry and Exit |
|---|---|---|---|---|
| BTC is uptrending with increasing volume during positive events | The MACD line goes above the signal line in a bullish crossover. | Stop-loss order is placed below the last swing low at a risk tolerance of 1.5% The take profit is based on two targets of 2% each for a total of 4% | The bullish crossover in the MACD is further confirmed with the RSI at an oversold level. | The long position is opened one the RRSI reaches the 40 level. The trade will exit automaticallly at the stop-loss or take profit orders. |
Conclusion and Call To Action
As we learned, the MACD is a reliable indicator primarily for trends but can be versatile when integrated with other indicators. In this article, we emphasized the importance of risk management and a trading plan as an aspect to consider when measuring the effectiveness of a MACD strategy.
In Altrady you can put all those concepts into practice through a free paper trading account that will help you refine your trading plan alongside the MACD strategy. Sign Up now and start a MACD trading path.
Catalin is the co-founder of Altrady. With a background in Marketing, Business Development & Software Development. With more than 15 years of experience working in Startups or large corporations.