1. Introduction to MACD Indicator
MACD (Moving Average Convergence Divergence) is a tool that analyzes the relationship between two moving averages, namely the fast line and the slow line. Essentially, the MACD indicator is used to assess and predict changes or continuations in price trends.
2. How to Activate MACD Indicator?
To activate the MACD indicator, open the indicator library and search for MACD. Once selected, the MACD indicator will appear below.
3. Blue Line and Orange Line
The green line (DIF or fast line) represents the difference between the short-term (12-period) EMA and the long-term (26-period) EMA, also known as the fast line. It reflects market changes within a shorter time span and is therefore more sensitive than the slow line. The orange line (DEA or slow line) is the 9-period EMA of the DIF and is also known as the slow line. It is a smoothed line calculated from the DIF and reflects market changes over a longer time span, making it smoother and slightly lagging compared to the fast line. The MACD histogram displays the difference between DIF and DEA. With these three elements, we can assess market trends and momentum changes.
4. MACD Golden Cross and Death Cross Trading Strategy
In a downtrend, when the fast line crosses above the slow line, it is called a golden cross. This indicates a potential shift from a downtrend to an uptrend, presenting a buying opportunity. In an uptrend, when the fast line crosses below the slow line, it is called a death cross. This suggests a potential shift from an uptrend to a downtrend, providing a reasonable entry point for selling. This is the traditional usage of MACD.
5. MACD Divergence Trading Strategy
a. MACD Bearish Divergence: When the high point of the price is higher than the previous high, it is called a double top. Ideally, the MACD should also form a double top to correspond to the price trend momentum. However, if the MACD forms a double bottom instead, it indicates a weakening of the price trend momentum. If the second high point is higher than the first, it is called a triple top. When the price forms a triple top but the MACD forms a double bottom, it is called a bearish divergence. If we see a triple top formation in the price but a double bottom formation in the MACD, it is a bearish divergence. This suggests a high probability of a downward trend reversal. We need to identify key price levels and MACD trend reversal divergences to confirm the trend.
b. MACD Bullish Divergence: When the low point of the price is lower than the previous low, it is called a double bottom. However, if the MACD forms a double top instead, it indicates the entry of buying momentum, gradually weakening the downward price momentum. In this case, when the price forms a double bottom but the MACD forms a double top, it is called a bullish divergence. After the bullish divergence forms, it indicates a high probability of a trend reversal to an upward trend, providing a reasonable buying opportunity.
c. MACD Trend Reversal Trading Strategy: Key price levels + MACD trend reversal divergence. Find two peaks connected by a line, and find the corresponding two peaks on the MACD at the bottom. The first step is to determine the key support level, which can be determined by multiple price tests and a subsequent significant rise. When the price returns to this key support level, we can look for a buying signal. For example, if we find a peak that has gone through a round of ups and downs and returned to the support level. However, please note that we cannot buy yet. We need another signal to confirm the validity of this bullish divergence. We can draw a downtrend line, and if we see a descending wedge triangle, it is a bullish chart pattern. When the price breaks through the descending wedge triangle, we can enter a long position. If these two conditions are met, breaking the downtrend line and breaking the previous high, this indicates a trend reversal. The price is highly likely to shift from a downtrend to an uptrend, and we can enter a long position after the price breaks the previous high. In summary, key price levels + MACD trend reversal divergence.
6. How to Find Support Levels?
Support levels can be understood as multiple retracement points forming valleys or peaks, where the price has tested these levels multiple times. It can be a small price range or a specific point. As we mentioned earlier, MACD divergence + key price levels, and the key price level is whether this support level has been broken.
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