The rapid evolution in technology paved the way for contactless payments like Apple Pay and has now led to the emergence of a new payment system: cryptocurrency.
Cryptocurrency is a decentralized digital currency, built using blockchain technology. It enables anyone anywhere to send and receive payments and uses an online ledger with strong cryptography to secure online transactions. A peer-to-peer computer network is used to confirm purchases directly between users, thereby eliminating the need for intermediaries like banks and governments.
Bitcoin was the first cryptocurrency to go mainstream. Presently, there are more than 5000 different types of cryptocurrencies, with more getting developed every day.
According to cryptocurrency data and analytics provider, CoinMarketCap, the top 10 largest trading cryptocurrencies by market capitalization include Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), Tether (USDT), Cardano (ADA), Solana (SOL), XRP (XRP), Polkadot (DOT), Dogecoin (DOGE), and SHIBA INU (SHIB).
For buying or selling cryptocurrencies, you will need to use a cryptocurrency exchange. These online services often work similarly to a stockbroker, giving you the tools to buy and sell digital currencies. You can deposit fiat currency (like U.S. dollars), and use those funds to purchase cryptocurrency. The exchanges allow you to trade your cryptocurrency for another cryptocurrency, and some even give interest on cryptocurrency held within the exchange account.
The cryptocurrency market is quite volatile, so be warned that there would be dramatic ups and downs in prices. That said, the crypto market could also be quite profitable when you do the trading with specific strategies in place.
While most analysts would agree there is no “perfect” trading strategy, there are many methods that are well suited to those interested in trading cryptocurrencies.
Over the next few weeks, we will be covering various crypto trading strategies. You can simply pick out the ones best suited for the market direction and your trading style.
Crypto Trading Strategy Based On MACD
For today’s trading strategy, we will be using the Moving Average Convergence Divergence indicator (or MACD for short) as the technical indicator.
What is the MACD indicator?
The MACD indicator measures the relationship between the 26-period Exponential Moving Average (EMA) and the 12-period EMA. MACD is an indicator that follows the trend and is used to give you an idea of how overbought or oversold a market condition exactly is.
The MACD indicator consists of three parts: MACD line (blue color), MACD Signal Line (orange color), and the MACD Histogram. The line at the center is called the zero line.
MACD Indicator – Components
Using MACD Crosses for Trading
MACD, as a standalone indicator, can be used for identifying buy and sell signals. MACD crosses provide confirmation of a trend change, at least in the short term.
For instance, when the MACD line crosses above the MACD signal line, it is known as a bullish cross. Conversely, when the MACD line crosses below the MACD signal line, it is known as a bearish cross. The crosses indicate a shift in trend momentum and represent buy or sell signals.
MACD crosses can be used to enter into long or short positions. For instance, as seen in the SOLUSD chart below, whenever the MACD line crosses above the signal line and is below the zero line, it is considered as a buy signal. (Note: Some traders prefer to wait for confirmation of an upward trend by waiting for the MACD line to cross over the zero line before opening a long position.) Soon after, the prices started to move upwards.
MACD Cross – SOLUSD Chart
Similarly, a bearish signal is triggered when the MACD line crosses below the signal line and is above the zero line. Soon after, the prices started to move downwards. (Again, may traders wait for the confirmation, until the MACD line crosses below the zero line, before entering short positions).
Next, we can learn how to use divergence between the MACD indicator and the crypto price to trade the cryptocurrency.
Crypto Trading Strategy Based On The Divergence Between MACD and Price
Divergence can be defined as a ‘disagreement’ between the price action and a technical indicator. Divergence occurs when a cryptocurrency price makes a new high or low in price but the technical indicator does not make a corresponding new high or low value. This means that two different signals are generated.
The Two Types of Divergences
Divergences can be broadly categorized into two types – bullish divergence and bearish divergence.
Bullish divergence
A bullish divergence (also called a positive divergence) occurs when crypto prices create a new low while the MACD indicator fails to hit a new low. A bullish divergence signals that the bears are losing power and that the bulls are getting poised to control the market again. Typically, a bullish divergence marks the end of a downtrend.
As indicated in the chart of BTCUSD below, the price made lower lows while the MACD indicator started to climb and made higher lows. After that, prices started to move upwards.
MACD – Price Bullish Divergence – BTCUSD Chart
Bearish divergence
A bearish divergence (also called a negative divergence) occurs when crypto prices rally to a new high while the MACD indicator doesn’t hit a new peak. This is considered as a signal that the bears are ready to take control again.
As indicated in the chart of ETHUSD below, the price made higher highs while the MACD indicator started to make lower highs. After that, prices started to move upwards.
MACD – Price Bearish Divergence – ETHUSD Chart
Hidden Divergences
In addition to the regular bullish and bearish divergences, there are also hidden divergences.
The regular divergence typically points to a possible reversal or change in the price direction. On the other hand, hidden divergences can tell you ahead of time when a trend looks set to continue.
Hidden divergences are also of two types – bullish hidden divergence and bearish hidden divergence.
Bullish hidden divergence
If the price of the crypto makes a series of higher lows, it indicates that an uptrend is underway. At the same time, if the MACD indicator makes a series of lower lows, it demonstrates hidden bullish divergence. In this case, it points to the possibility that the uptrend will continue.
The ETHUSD chart below shows a bullish hidden divergence.
MACD – Price Hidden Bullish Divergence – ETHUSD Chart
Bearish hidden divergence
If the price of the crypto makes a series of lower highs, it indicates that a downtrend is underway. At the same time, if the MACD indicator makes a series of higher highs, it demonstrates hidden bearish divergence. In this case, it suggests that the downtrend will continue.
An example of bearish hidden divergence can be seen in the ETHUSD chart below.
MACD – Price Hidden Bearish Divergence – ETHUSD Chart
As you can see, divergences can be quite useful to predict the upcoming direction of the price. It may be noted that the reliability of divergences is higher when you are using higher timeframes. This means that a signal that is produced on, say a 4-hour chart or daily chart is typically more reliable than a signal produced on say, the 15-minute chart.
Happy trading!
Trades of the Day Research Team