Here’s 5 ways investors can use the MACD indicator to make better trades

Traders use the MACD indicator to identify turning points, facilitate entries on pullbacks and capture the larger part of a move until the trend starts to reverse course.

The Moving Average Convergence Divergence, also called the MACD, is a trend-following momentum indicator used widely by traders. Although the MACD is a lagging indicator, it can be very useful in identifying possible trend changes.

BTC/USDT daily chart. Source: TradingView

The MACD oscillates above and below a zero line, also known as the centerline. The shorter moving average is subtracted from a longer moving average to arrive at the value of the MACD. A signal line, which is the exponential moving average of the MACD completes the indicator.

The blue line is the MACD and the red line is the signal line. When the blue line crosses above the red line, it is a signal to buy and when the blue line falls below the red line, it is a trigger to sell. A cross above the centerline is also a buy signal.

Let’s have a look at how to use the indicator for better entries and exits from a variety of positions. Afterward, we’ll investigate how the MACD is analyzed during pullbacks and in an uptrend. Lastly, we’ll take a brief look at the importance of divergences on the MACD.

Adapting the indicator to crypto market volatility

Compared to legacy markets, cryptocurrencies witness large movements in a short time. Therefore, the entries and exits should be quick to capture a large part of the move but without too many whipsaw trades.

When a new uptrend starts, it generally remains in force for a few weeks or months. However, every bull phase has its share of corrections. Traders should aim to stay with the trend and not get stopped out by every minor pullback along the way.

The goal should be to enter the position early as the new uptrend starts and remain with the position until a trend reversal is signaled. However, that is easier said than done. If the indicator gives too many signals, there will be several unwanted trades which will incur large commissions and be emotionally draining.

On the other hand, if the time frames are chosen to give fewer signals, a large part of the trend could be missed as the indicator will be slow in identifying reversals.

This problem was addressed by MACD creator Gerald Appel in his book, Technical Analysis: Power Tools for active investors.

Appel highlights how two MACD indicators can be used during strong trends, with the more sensitive one being used for entries and the less sensitive one being used for exits.

Related: Unsure about buying the dip? This key trading indicator makes it easier

Are two MACDs better than one?

The default value used for the MACD indicator by most charting software is the 12- to 26-day combination. However, for the subsequent examples, let’s use one MACD with the 19- to 39-day combination which is less sensitive and will be used for generating sell signals. The second one will be more sensitive, using the 6- to 19-day MACD combination which will be used for buy signals.

BTC/USDT daily chart. Source: TradingView

Bitcoin (BTC) was trading in a small range in September 2020 and during that period, both MACD indicators were largely flat. In October, as the BTC/USDT pair started an uptrend, the MACD gave a buy signal when the indicator crossed above the centerline in mid-October of 2020.

After entering the trade, watch how the MACD came close to the signal line on four occasions (marked as ellipses on the chart) on the sensitive 6- to 19-day MACD combination. This could have resulted in an early exit, leaving a large part of the gains on the table as the uptrend was only getting started.

On the other hand, notice how the less sensitive 19- to 39-day combination remained steady during the uptrend. This could have made it easier for the trader to stay in the trade till the MACD dropped below the signal line on Nov. 26, 2020, triggering a sell signal.

BNB/USDT daily chart. Source: TradingView

In another example, Binance Coin (BNB) crossed over the centerline on July 7, 2020, triggering a buy signal. However, the sensitive MACD quickly turned down and dipped below the signal line on July 6, as the BNB/USDT pair entered a minor correction.

Comparatively, the less sensitive MACD remained above the signal line until Aug. 12, 2020, capturing a larger portion of the trend.

LTC/USDT daily chart. Source: TradingView

Traders who find it difficult to keep track of two MACD indicators can also use the default 12- to 26-day combination. Litecoin’s (LTC) journey from about $75 to $413.49 generated five buy and sell signals. All the trades generated good entry (marked as ellipses) and exit (marked with arrows) signals.

Related: 3 ways traders use moving averages to read market momentum

How the MACD can signal corrections

Traders can also use the MACD to buy pullbacks. During corrections in an uptrend, the MACD drops to the signal line but as the price resumes its uptrend the MACD rebounds off the signal line. This formation, which looks similar to a hook, can give a good entry opportunity.

ADA/USDT daily chart. Source: TradingView

In the example above, Cardano (ADA) crossed over the centerline on Jan. 8, 2020, signaling a buy. However, as the up-move stalled, the MACD dropped close to the signal line on Jan. 26, 2020 but did not break below it. As the price recovered, the MACD broke away from the signal line and resumed its move higher.

This gave an opportunity to traders who may have missed buying the cross above the centerline. The sell signal was generated on Feb. 16 just as the ADA/USDT pair was starting a deep correction.

MACD divergences can also signal a trend change

BTC/USDT daily chart. Source: TradingView

Bitcoin’s price continued to make higher highs between Feb. 21, 2021, and April 14 but the MACD indicator made lower highs during the period, forming a bearish divergence. This was a sign that the momentum was weakening.

Traders should become cautious when a bearish divergence forms and avoid taking long trades during such a period. The long bearish divergence in this case culminated with a massive fall.

LTC/USDT daily chart. Source: TradingView

Litecoin shows how the MACD formed a bullish divergence during a strong downtrend from July to December 2019. Traders who bought the crossover above the centerline may have been whipsawed in September and again in November.

This shows that traders should wait for the price action to show signs of changing its trend before acting on the MACD divergences.

A few important takeaways

The MACD indicator captures the trend and also can be used to gauge an asset’s momentum. Depending on the market conditions and the asset being analyzed,  traders may vary the period setting of the MACD. If a coin is a fast mover, a more sensitive MACD could be used. With slow movers, the default setting or a less sensitive MACD may be used. Traders can also use a combination of a less sensitive and more sensitive MACD indicator for better results.

However, there is no perfect indicator that works all the time. Even with the above permutations and combinations, trades will move opposite to expectations.

Traders should deploy money management principles to cut losses quickly and protect the paper gains when the trade moves as per the assumption.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

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Here’s how the Purpose Bitcoin ETF differs from Grayscale’s GBTC Trust

The newly launched Purpose Bitcoin ETF surpassed even the most bullish expectations but how does it differ from Grayscale’s GBTC Trust?

Since 2017, investors have been anxiously awaiting a Bitcoin ETF approval as the existence of such a fund was an important symbol of mass adoption and acceptance from the realm of traditional finance. 

On Feb. 18, the Toronto Stock Exchange hosted the official launch of the Purpose Bitcoin ETF and the fund quickly absorbed more than $333 million in market capitalization in just two days.

Now that the long-awaited Bitcoin ETF is here, investors are curious about how it will compete with Grayscale Investments GBTC fund. On Feb. 17, Ark Investment Management founder and CEO Cathie Wood said the likelihood that U.S. regulators will approve a Bitcoin exchange-traded fund has gone up.

Although exchange-traded funds (ETF) and exchange-traded notes (ETN) sound quite similar, there are fundamental differences in trading, risks, and taxation.

What is an exchange-traded fund?

An ETF is a security type that holds underlying investments such as commodities, stocks, or bonds. It often resembles a mutual fund, as it is pooled and managed by its issuer.

ETFs have become a $7.7 trillion industry, growing by 65% in the last two years alone.

The most recognizable example is the SPY, a fund that tracks the S&P 500 index, currently managed by State Street. Invesco’s QQQ is another EFT that tracks U.S.-based large-capitalization technology companies.

More exotic structures are available, such as the ProShares UltraShort Bloomberg Crude Oil ($SCO). Using derivatives products, this fund aims to offer two times the daily short leverage on oil prices.

What is an exchange-traded note?

Exchange-traded notes (ETN) are similar to an ETF in that trading occurs using traditional brokers. Still, the difference is an ETN is a debt instrument issued by a financial institution. Even if the fund has a redemption program, the credit risk relies entirely on its issuer.

For example, after Lehman Brothers imploded in 2008, it took ETN investors more than a decade to recoup the investment.

On the other hand, buying an ETF gives one direct ownership of its contents, creating different taxation events when holding futures contracts and leveraging positions. Meanwhile, ETNs are taxed exclusively upon sale.

GBTC does not offer conversion or redemption

Grayscale’s Bitcoin Trust Fund (GBTC) is the absolute leader in the cryptocurrency market, with $35 billion in assets under management.

Investment trusts are structured as companies — at least in regulatory form — and are ‘closed-end funds.’ Thus, the number of shares available is limited and the supply and demand for them largely determines their price.

Investment trust funds are regulated by the U.S. Office of the Comptroller of the Currency (OCC), therefore outside the Securities and Exchange Commission (SEC) authority.

GBTC shares cannot easily be created, neither is there an active redemption program in place. This tends to generate significant price discrepancies from its Net Asset Value, which is the underlying BTC fraction represented.

An ETF, on the other hand, allows the market maker to create and redeem shares at will. Therefore, a premium or discount is usually unlikely if enough liquidity is in place.

An ETF instrument is far more acceptable to mutual fund managers and pension funds as it carries much less risk than a closed-ended trust like GBTC. Retail investors may not have been aware of the possibility that GBTC trades below net assets value. Thus the recent event might further pressure investors to move their position to the Canadian ETF.

To sum up, an ETF product carries a significantly less risk due to greater transparency and the possibility to redeem shares in the case of shares trading at a discount.

Nevertheless, the impressive GBTC market capitalization clearly states that institutional investors are already on board.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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Here’s how multi-leg options allow traders to profit from $2K Ethereum price

Using multi-leg options can give traders a less risky way to invest in Ethereum price as it pushes above $2,000.

This week Ether (ETH) price finally broke through the $2,000 level as aggressive institutional inflow through Grayscale Investments products and declining exchange reserves signaled that buying pressure was increasing.

While many traders are skilled at using perpetual futures and the basic margin investing tools available on most exchanges, they may be unaware of additional instruments that can be used to maximize their gains. One simple way, albeit expensive, is buying Ether call option contracts.

Ether 60-day historical volatility. Source: TradingView

For example, a March 26 call option with a $1,760 strike trades at $340. In the current situation, the holder would only profit if Ether trades above $2,180 in 39 days, a 21% gain from the current $1,800. If Ether remains flat at $1,800, this trader will lose $300. This is certainly not an excellent risk-reward profile.

By using call (buy) options and puts (sell), a trader can create strategies to reduce this cost and improve the potential gains. They can be used in bullish and bearish circumstances and most exchanges offer easily accessible options platforms now.

The suggested bullish strategy consists of selling a $2,240 put to create positive exposure to Ether while simultaneously selling a $2,880 call to reduce gains above that level. These trades were modelled from Ether price at $1,800.

Two out-of-the-money (small odds) positions are needed to protect from the possible price crashes below 20% or Ether gains above 130%. Those additional trades will give the trader peace of mind while also reducing the margin (collateral) requirements.

Profit / Loss estimate. Source: Deribit Position Builder

The above trade consists of selling 1 Ether contract of the March 26 put option with a $2,240 strike while selling another 1 Ether contract of the $2,880 strike. The additional trades also avoid the unexpected scenarios for the same expiry date.

The trader needs to buy 0.73 Ether contracts of the $4,160 call in order to avoid excessive upside losses. Similarly, buying 1.26 Ether contracts of $1,440 puts will protect against more significant negative price moves.

As the estimate above shows, any outcome between $1,780 and $3,885 is positive. For example, a 20% price increase to $2,160 results in a $478 net gain. Meanwhile, this strategy’s maximum loss is $425 if Ether trades at $1,440 or lower on March 26.

On the other hand, this strategy can net a positive $580 or higher gain from $2,240 to $3,100 at expiry. Overall it yields a much better risk-reward from leveraged futures trading, for example. Using 3x leverage would incur a $425 loss as soon as Ether drops 8%.

This multiple options strategy trade provides a better risk-reward for those seeking exposure to Ether’s price increase. Moreover, there is zero upfront funds involved for the strategy, except from the margin or collateral deposit requirements.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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USDT-settled futures contracts are gaining popularity, here’s why

Crypto exchanges offer USDT and BTC settled perpetual futures contracts but which is best suited for the average trader?

When BitMEX launched its Bitcoin (BTC) perpetual futures market in 2016, it created a new paradigm for cryptocurrency traders. Although this was not the first platform to offer BTC-settled inverse swaps, BitMEX brought usability and liquidity to a broader audience of investors.

BitMEX contracts did not involve fiat or stablecoins and even though the reference price was calculated in USD all profits and losses were paid in BTC.

Fast forward to 2021, and the Tether (USDT) settled contracts have gained relevance. Using USDT-based contracts certainly makes it easier for retail investors to calculate their profit, loss and the required margin required but they also have disadvantages.

Why BTC-settled contracts are for more experienced traders

Binance coin-margined perpetual futures. Source: Binance

Binance offers coin-margined (BTC-settled) contracts and in this case, instead of relying on USDT margin, the buyer (long) and the seller (short) are required to deposit BTC as margin.

When trading coin-margined contracts there is no need to use stablecoins. Therefore, it has less collateral (margin) risk. Algorithmic-backed stablecoins have stabilization issues, while the fiat-backed ones run risks of seizures and government controls. Therefore, by exclusively depositing and redeeming BTC, a trader can bypass these risks.

On the negative side, whenever the price of BTC goes down, so does one’s collateral in USD terms. This impact happens because the contracts are priced in USD. Whenever a futures position is opened the quantity is always in contract quantity, either 1 contract = 1 USD at Bitmex and Deribit, or 1 contract = 100 USDat Binance, Huobi and OKEx.

This effect is known as non-linear inverse future returns and the buyer incurs more losses when BTC price collapses. The difference grows wider the further the reference price moves down from the initial position.

USDT-settled contracts are riskier but easier to manage

USDT-settled futures contracts are easier to manage because the returns are linear and unaffected by strong BTC price moves. For those willing to short the futures contracts, there is no need to buy BTC at any time, but there are costs involved to keep open positions.

This contract doesn’t need an active hedge to protect collateral (margin) exposure, thus it’s a better choice for retail traders.

It is worth noting that carrying long-term positions on any stablecoins has an embedded risk, which increases when third party custody services are used. This is one reason why stakers can obtain over 11% APY on stablecoin deposits.

Whether an investor measures returns in BTC or fiat also plays a massive part in this decision. Arbitrage desks and market makers tend to prefer USDT-settled contracts as their alternative investment is either staking or low-risk cash and carry trades.

On the other hand, cryptocurrency retail investors usually hold BTC or switch into altcoins aiming for higher returns than a fixed APY. Thus, by being the preferred instrument of professional traders, USDT-settled futures are gaining more traction.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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3 key metrics to watch as Bitcoin price tries to top $20,000

Afraid Bitcoin price might crash? These three key metrics help traders spot bullish and bearish sentiment in the crypto market.

For the past week, Bitcoin (BTC) price has been flirting with the $20,000 mark, which has led some traders to lose their patience. In the eyes of some traders, the lack of bullish momentum is problematic, especially considering that BTC tested the $16,200 level roughly a week ago.

Experienced traders know that there are key indicators that serve as telling signs of a trend reversal. These are volumes, the futures premium, and top traders’ positions at major exchanges.

A handful of negative indicators will not precede every dip, but there are some signs of weakness more often than not. Every trader has their own system, and some will only act if three or more bearish conditions are met, but there is no set rule for knowing when to buy or sell.

Futures contracts should not trade below spot exchanges

Some websites host trading indicators that claim to show the long-to-short ratio for various assets, but in reality, they are simply comparing the volume of the bids and offers stacked.

Others will refer to the leaderboard data, therefore monitoring accounts that did not opt-out from the ranking, but this is not accurate.

A better method is to monitor the perpetual futures (inverse swap) funding rate.

The open interest of buyers and sellers of perpetual contracts is matched at all times in any futures contract. There is simply no way an imbalance can happen, as every trade requires a buyer (long) and a seller (short).

Funding rates ensure there are no exchange risk imbalances. When sellers (shorts) are the ones demanding more leverage, the funding rate goes negative. Therefore, those traders will be the ones paying up the fees.

BTC perpetual futures weekly funding rates. Source: Digital Assets Data

Sudden shifts to the negative range indicate a strong willingness to keep short positions open. Ideally, investors will monitor a couple of exchanges simultaneously to avoid eventual anomalies.

The funding rate might bring some distortions as it’s the preferred instrument of retail traders and, as a result, is impacted by excessive leverage. Professional traders tend to dominate longer-term futures contracts with set expiry dates.

By measuring how much more expensive futures are versus the regular spot market, a trader can gauge their bullishness level.

Jan. 2021 BTC futures premium. Source: Digital Assets Data

Take notice of how the fixed-calendar futures should usually trade with a 0.5% or higher premium versus regular spot exchanges. Whenever this premium fades or turns negative, this is an alarming red flag. Such a situation, also known as backwardation, indicates strong bearishness.

Monitoring volume is key

In addition to monitoring futures contracts, good traders also track volume in the spot market. Breaking important resistance levels on low volumes is somehow intriguing. Typically, low volumes indicate a lack of confidence. Therefore significant price changes should be accompanied by robust trading volume.

BTC aggregate spot exchanges volume. Source: Coinalyze.net

Although the recent volumes have been above average, traders should remain skeptical of significant price swings below $3 billion in daily volume, especially considering the past 30 days.

Based on the past month of data, the volume will be a fundamental metric to watch as traders attempt to push Bitcoin price through the $20,000 level.

Top traders long-to-short ratio can anticipate price changes

Another key metric savvy investors monitor is the top traders’ long-to-short ratio that can be found at leading crypto exchanges.

There are often discrepancies between exchanges’ methodology, so readers should monitor changes instead of absolute figures.

Binance BTC top traders long-to-short ratio. Source: Binance

A sudden move below the 1.00 long-to-short ratio would be a troubling signal in the above example. This is because historical 30-day data and the current 1.23 figure favor longs.

As previously mentioned, the ratio can differ significantly between exchanges, but this effect can be neutralized by avoiding direct comparisons.

OKEx BTC top traders long-to-short ratio. Source: Bybt.com

Unlike Binance, it is common for OKEx top traders to hold levels below 1.00, albeit not necessarily indicating bearishness. According to its 30-day data, numbers below 0.75 should be considered worrisome.

There is no set rule or method for predicting large dips as some traders require that multiple indicators turn bearish before they enter short positions or close their long positions.

With that said, monitoring the funding rate, spot volumes, and the top traders’ long-to-short ratio provides a much clearer view of the market than simply reading candlestick patterns and general oscillators like the Relative Strength Index and Moving Average Convergence Divergence.

This is because the metrics discussed provide a direct gauge of professional traders’ sentiment, and it is crucial to have a clear view of this as BTC tries to break $20,000.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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