MACD Analysis Buy and Sell Trading Signals
Because the MACD uses 26 and 12 EMAs to make its plot, we'll compare these EMAs to the MACD to understand how these Index buy and sell signals happen.
MACD - Example of MACD Indicator
The MACD is a leading indicator, which means that it produces Index signals that lead the price action as opposed to lagging indicators, which lag behind the price.
Buy Trade
A Buy trade signal is generated when the MACD's fast line crosses above its corresponding signal line. Regardless, like all leading indicators, these signals carry an inherent risk of false movements known as whipsaws.
To mitigate the impact of false signals (whipsaws), it is prudent to await confirmation for either buy or sell signals pertaining to the Index. The confirming Index signal manifests when both lines intersect above the zero line: upon this occurrence, the derived and generated buy signal is deemed reliable.
In the accompanying visual example, the Moving Average indicator generated an initial buy signal *before* the price began its ascent. However, confirmation of the buy signal was only achieved when the MACD crossed above the zero line, accompanied by a crossover event in the MAs. Experience suggests it's generally prudent to enter a buy position after both MACD lines have successfully moved above the zero center mark.
Where to Buy using MACD - Buy Signal
Sell Trade
A sell index signal is generated when the MACD fast line crosses below the signal line. However, similar to buy signals, these are also vulnerable to whipsaws or false signals.
To eliminate the whipsaws its good to wait for confirmation of the sell Index signal. Confirmation is when the 2 lines cross below zero mark, when this happens the sell signal derived/generated is a reliable signal.
In the example shown, a moving average gave a sell signal. It got confirmed when MACD crossed below the zero line and averages crossed over at the same time.
Where to Sell using MACD - Sell Signal
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