49 SHARES Share Tweet

In today’s chart reading training, we are going to discuss 2 commonly used momentum tactics: EMA and MACD. Both of these indicators go hand-in-hand because the EMA is actually used in order to create the MACD indicator. The ultimate goal of this article is to help you use the MACD indicator but I need to explain the EMA in order for it to make sense. PLEASE NOTE: Read until the end of this article. It might be confusing at the beginning but you need to read the entire article to understand how to apply it when you trade.



First off, if you want to follow along with this article, CLICK HERE



Setup

We are using the same setup as our last training article. Refer to the image below in order to setup the MACD on a chart inside of CryptoCompare.



What is the EMA?

The first thing that we need to look at is the Exponential Moving Average. The EMA is a moving average that helps to show accurate trends by creating average prices based on past and current data.



Here is the equation:

EMA: {Close – EMA(previous day)} x multiplier + EMA(previous day)

The good thing about the EMA is that is contains a multiplier which helps to weight current data heavier than previous data. Applying more weight to recent data helps to reduce lag in the line to make it more accurate at predicting trends.



The EMA is able to be calculated in different ways to either increase or reduce how volatile the indicator is. It is done in the same manner as the RSI, you increase or decrease the timeframe of the calculation. For example, the chart below has 3 lines. The blue line is the coin price. The orange like is the 5 day EMA. The green line is the 26 day EMA. As you can see, the 5 day EMA line is much more reactive than the 26 day EMA line.

You might be wondering how any of this is useful when trading. I am going to explain that by explaining the MACD.



What is the MACD?

The EMA is used to help create the Moving Average Convergence/Divergence oscillator. The MACD is comprised of 2 lines: the MACD line and the signal line.



MACD Line:

12 Day EMA – 26 Day EMA



Signal Line:

9 Day EMA of MACD Line



So the MACD is using the EMA to create it’s own values to graph. Again, this all probably sounds confusing because I am explaining how it works. Keep reading and you will see how to actually apply this when you trade.



The MACD is used to help predict momentum changes by giving a visual representation to different moving averages. If the MACD line crosses up over the signal line, a positive trend seems to be emerging. If the MACD line crosses down over the signal line, a negative trend seems to be emerging.



Take a look at the image below:







The green line shows when the indicator said a positive trend was emerging. The red line is when the indicator said that a negative trend was emerging. Keep in mind, if you look closely there are some false positives. There were times that the indicator crossed positive but the chart continued in a negative direction.



There you have it! The MACD is a great tool to use to help you predict emerging trends. I hope that I was able to simplify this enough so that you could fully understand how it works. If you have any questions, please feel free to ask them in the comments below!