Introduction
In our previous lesson "K-Line Basics (Part 1)", we covered essential K-line patterns, bullish formations, and bearish combinations. This second installment dives deeper into two powerful technical indicators: MACD and Bollinger Bands.
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Part 1: MACD - The Trend Indicator
1. Understanding MACD
MACD (Moving Average Convergence Divergence), developed by Gerald Appel in 1979, measures the relationship between:
- 12-day exponential moving average (short-term)
- 26-day exponential moving average (long-term)
This classic indicator helps identify:
- Market trend changes
- Buying/selling opportunities across different timeframes
2. Practical Applications
2.1 Trend Following Strategy (Golden Cross/Death Cross)
Golden Cross (Buy Signal):
- When both DIF and DEA are above zero, and DIF crosses above DEA → Strong uptrend
- When both are below zero and DIF crosses above DEA → Potential trend reversal
Death Cross (Sell Signal):
- Both lines above zero with DIF crossing below DEA → Weakness ahead
- Both below zero with DIF crossing below DEA → Extended bear market
2.2 Counter-Trend Strategy (Divergence Trading)
Top Divergence (Sell Signal):
Price makes higher highs while MACD makes lower highs → Imminent reversal
Bottom Divergence (Buy Signal):
Price shows lower lows as MACD forms higher lows → Potential upside
Real-World Bitcoin Example:
- Top divergence formed during 2018 BTC peak → 80% price drop followed
- Bottom divergence in early 2019 → Precursor to 300% rally
- Death cross at $60,000 → Preceded 55% correction
- Golden cross in 2020 → Initiated historic bull run
Part 2: Bollinger Bands - The Volatility Gauge
1. Bollinger Bands Explained
This three-line system consists of:
- Middle Band (20-day SMA)
- Upper Band (+2 standard deviations)
- Lower Band (-2 standard deviations)
The bands dynamically adjust to market volatility, creating a "price channel".
2. Trading Strategies
2.1 Band Positioning Signals
- Upper/Middle Channel: Bullish territory (hold/buy)
- Lower/Middle Channel: Bearish zone (sell/avoid)
- Price crosses middle band: Potential trend change
2.2 Band Width Analysis
- Expanding Bands: Increased volatility → Strong momentum
- Contracting Bands: Reduced volatility → Breakout imminent
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2.3 Eight Essential Rules
- Expanding bands + price above middle → Buy
- Expanding bands + price below middle → Sell
- Contracting bands + upper half position → Accumulate
- Contracting bands + lower half position → Reduce exposure
- Upper band touch → Profit-taking opportunity
- Lower band touch → Potential bounce
- Middle band acts as support/resistance pivot
- Three-band convergence → Major move coming
FAQ Section
Q: Can MACD be used alone for trading decisions?
A: No technical indicator should be used in isolation. Combine MACD with price action, volume analysis, and other indicators for higher-probability trades.
Q: What timeframe works best for Bollinger Bands?
A: Daily and weekly charts provide the most reliable signals, though traders often use 4-hour bands for shorter-term positions.
Q: How reliable are divergence signals?
A: While powerful, divergences work best when confirmed by:
- Support/resistance levels
- Volume patterns
- Candlestick reversal formations
Q: Should traders adjust Bollinger Band settings?
A: The standard 20-period/2-deviation setup works for most markets. Only experienced traders should modify parameters after thorough backtesting.
Conclusion
Mastering MACD and Bollinger Bands requires:
- Understanding their mathematical foundations
- Recognizing multiple confirmation signals
- Practicing on historical charts
In our next lesson, we'll explore:
- Common bottom patterns
- Top reversal formations
- Institutional accumulation/distribution tactics