Trading cryptocurrencies using the MACD indicator – part 2/2
MACD Overbought and Oversold conditions
The MACD indicator is great for identifying possible changes in a trend and spotting trend reversals. However, it can also identify overbought market conditions or oversold market conditions.
The overbought and oversold market conditions are presented on the indicator when the MACD line and the signal line are separated too far away from each other as well as from the zero-line.
BTC/USD Weekly Chart example
As can be seen in the picture, the MACD line started to stray noticeably far away from the indicator’s signal line in December 2017. On top of that, both the MACD line and Signal were well above the zero-line at that time.
The combination of the two warned careful investors that the price surge was causing the market to become overextended and that a pullback was becoming extremely likely.
The so-called zero line marks the midpoint of the MACD oscillator, splitting the value range in half. When the 12-period exponential moving average crosses above the 26-period EMA, the MACD will cross above the zero-line, therefore presenting a buy signal. On the other hand, when the 12-period EMA crosses below the 26-period EMA, the MACD will go below the zero-line and will present a sell signal.
The histogram, which are the pink bars shown on the oscillator, quantifies the distance that is currently between the MACD line and the signal line. The histogram will print a bar above the zero-line when the MACD line is above the signal line. On the other hand, it will print a bar below when the MACD line is below the signal line. The bigger the size of the bar, the larger the gap between the two lines is.
When the histogram reaches its highest level, it will show the MACD line at its farthest point above the signal line. This situation implies that the rally is becoming overstretched, as shown in the chart.
The MACD oscillator is a great tool for traders that like following trends and spotting trend reversals. It comes in handy to both beginners and professionals alike.