The moving average convergence divergence (MACD) is yet again proving to be a strong bullish Bitcoin indicator that may soon see a trend reversal and end bitcoin’s months-long price consolidation.
In the latest 3D chart of bitcoin, we just saw the MACD line cross the signal line, making the price action look bullish. When the same crossover happened in April 2020, we saw the price of bitcoin rally over 900%. There is a lot that goes on with this trend-following momentum indicator, and to understand how you can identify possible trend changes- you need to know its components, settings, and its importance in a bull market. Let’s go.
What is MACD?
The Moving Average Convergence/Divergence is one of the most-used technical indicators by traders to get strong buy and sell signals. As the indicator is based on moving averages, it is used as a momentum tool or momentum filter. Its simplistic nature is favored by many traders and it helps capture large parts of a trend reversal. Having a combination of leading and lagging characteristics, MACD provides both versatility and reliability in different market conditions that traders desire.
What are the different components of MACD?
The heart of this indicator is The MACD line, but there are other components that factor in to predict and help visualize the price momentum. Four components of MACD:
- The MACD Line
- Signal Line
- Zero Line
- Histogram
The MACD Line
The MACD line is a complete moving average crossover system by itself, as it is calculated by subtracting the 26-day EMA from the 12-day EMA. The combinations can keep changing based on the charting software. For example, the 19-39 day combination is less sensitive and can be used for getting sell signals. For buy signals, many traders use 6-19 day MACD combinations. The MACD line is mainly used for signaling centerline crossovers, which show relative positions of EMAs.
The Signal Line
The signal line indicates a 9-period EMA, by default. When it is combined with the MACD line, we observe convergence and divergence. As it provides insights on previous movements, it is not always accurate.
The Zero Line
The zero line is where the MACD would be zero, and it shows when the 26-period EMA and the 12-period EMA reach the same level.
The MACD Histogram
This component of the MACD technical indicator is only for visualization of the MACD line and signal line movements. In simpler terms-
MACD histogram = MACD line – Signal line
Note- The histogram bars are in no way related to the trading volume.
How to read MACD charts
By using MACD indicators, we are basically relying on the relationship between two moving averages. So to find the right entries and exits, we have to capture MACD indicator signals called crossovers. When the MACD line crosses the signal line, they are known as signal crossovers. When the MACD line crosses below or above the zero lines. The signals obtained are centerline crossovers.
Centerline Crossovers
This crossover mainly tells us the direction in which the MACD line is moving. It can be in a negative or positive area. If it crosses above the zero line, it means we are seeing a greater 12-day EMA compared to 26-day. In the case of a negative area, the 26-day average is higher than the 12-day. These crossovers suggest strong upside or downside momentum, depending on whether it is positive or negative.
Signal Line Crossovers
A shift in market trends can be predicted by using signal line crossovers. When the MACD line crosses above the signal line, it means we are going to witness a trend reversal on the upside. When it goes below the signal line, we consider it as a selling opportunity.
Current Findings- MACD bullish crossover on 3D
The MACD crossover on 3D timeframe is showing bullish price movement and what could be a start to the next supercycle of bitcoin. Even in previous cycles, such MACD figures proved to support the notion that bitcoin could be about to rally. Let’s take a look at a few examples.
Note- The time frames play a significant role in understanding the movement of the market, so don’t compare the following with the current crossover on 3D.
BTC Weekly MACD 2015
In 2015, we have seen a similar move take place on the weekly chart, where the MACD crossover resulted in positive histogram bars and confirmed the bitcoin’s price bottom had been set.
The divergence was evident, as we have also observed the positive cross of the MACD line and the signal line.
BTC Weekly MACD 2018
In early February of 2018, the MACD line completed a bullish crossover and ended the predominant downtrend. The histogram also reached its highest value since Jan. In addition, we have also seen it fail to retest lower lows during its plunge from $6k to $3k. This only supports that bearish momentum got weak and presented another form of bullish divergence.
There have been many such instances when MACD indicators cross-initiated the bullish performance of bitcoin. In March of 2017, the price of bitcoin went from $971 to $20,000 after performing a bullish cross. This means- in less than ten months, the price of bitcoin increased by 2000 %.
Even in early 2019, the MACD indicator predicted a 400% rise in the price of bitcoin. Last year, we saw similar accurate MACD crosses, which have resulted in massive upside movement.
What this proves is that- MACD is a reliable metric and charting indicator, and has been accurate on numerous occasions, given the bullish cross takes place. Now, it has taken place, so we can expect to see a breakout sooner than later.
Born and brought up in India, Karthikeya Gutta is a crypto journalist and freelance contributor for ItsBlockchain. He covers various aspects of the industry with in-depth analysis and research. His passion towards blockchain and crypto ecosystem is mainly because he believes it can really change the world and help millions of people.
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