Pattern 1: MACD Cross
The MACD cross is one of the most straightforward and popular patterns utilised by traders worldwide. As the name suggests, the pattern is established when the MACD line, tracking the difference between the 12 and 26 period EMA, crosses the signal line, a 9 period EMA of the MACD line.
The crossing is termed as bullish when the MACD line surges above the signal line, indicating an upturn in momentum and thus, leading many traders to establish long positions. Conversely, when the MACD line dips below the signal line, a bearish cross is established, signifying potential downward price momentum and prompting traders to establish short positions.
This pattern effectively demonstrates the shifts in momentum and enables traders to capitalise on the trend before it actually happens. However, it also carries a risk of false signals, and hence should not be used in isolation.
Pattern 2: Zero Line Crossover
The zero line crossover is another powerful MACD pattern. The zero line crossover occurs when the MACD line crosses the zero line on the chart. A move above the zero line is considered as bullish, indicating that the shorter-term average is moving faster than the longer-term average hinting towards a potential uptrend.
On the other hand, when the MACD line moves downward below the zero line, it signals a bearish sentiment. This is because the shorter-term average is falling faster than the longer-term average, suggesting a potential downtrend for the asset.
Despite its efficacy, just like the MACD cross, it is important to note that the zero line crossover can sometimes produce false signals, especially in volatile markets.
Pattern 3: MACD Divergence
The MACD divergence is an extremely potent pattern used to identify potential trend reversals. This is observed when there’s a disconnect between price action and MACD performances.
A bullish divergence is indicated when the price forms successive lower lows while the MACD charts higher lows, signalling a possible uptrend. A bearish divergence is the reverse scenario denoting a possible downtrend – i.e., when the price forms higher highs while MACD charts lower highs.
The divergence pattern is particularly valuable in signalling exhaustive moves where the price action does not reflect the momentum. This could indicate a potential trend reversal, providing traders with a distinct edge.
Pattern 4: Overbought/Oversold Conditions
Although MACD is not typically classified as an overbought/oversold indicator, the MACD histogram can still provide valuable information about extreme conditions. When the MACD histogram reaches extreme highs or lows, it could indicate overbought or oversold conditions, respectively.
During an extended bullish trend, if the MACD histogram reaches a high point and begins to descend, this could signal that the bullish trend could be overextended and a bearish trend might soon follow. Conversely, during a strong bearish trend, if the MACD histogram reaches a low point and begins to ascend, it may signal that the bearish trend is overextended and a bullish reversal could be on the horizon.
This pattern is not foolproof and like other patterns, it can also provide false signals. However, when used in conjunction with other indicators and patterns, it can serve as a valuable tool for traders.
In conclusion, MACD is a versatile tool that offers various signal patterns to traders. While these patterns provide beneficial insights, they need to be used in conjunction with other technical analysis tools to minimize risks and maximize potential gains.
