The MACD Crossover Strategy

Technical Analysis: Mastering Market Indicators The MACD Crossover Strategy

The MACD (Moving Average Convergence Divergence) is a trend-following momentum indicator that shows the relationship between two moving averages of a stock’s price. To generate buy and sell signals:

Buy Signal: A common buy signal is generated when the MACD line (the difference between the 12-day and the 26-day exponential moving averages) crosses above the signal line (9-day EMA of the MACD line). This crossover indicates an upward momentum, suggesting it might be a good time to buy.
Sell Signal: Conversely, a sell signal is indicated when the MACD line crosses below the signal line. This crossover suggests a downward momentum, implying it might be time to sell.

This is the most basic strategy and it is called “MACD Crossover strategy”.

Additionally, traders often look for divergences between MACD and price as an indication of upcoming reversals. For example, if the price is making new highs but the MACD is not, it could signal a future price drop. The MACD is used by many traders around the world to help identify the current and potential future market direction of whatever market they trade.

Case for Sell Signal

When trading with the MACD indicator, you could take an aggressive sell signal when the MACD crosses down below the signal line.

However, the sell signal is considered stronger if the histogram bars cross below the zero line as well.

The image below shows the MACD providing three strong sell signals:

MACD has crossed down below the Signal line
The histogram is below the zero line

Summarizing –

A signal to sell is when the MACD has crossed below the signal line. The signal is stronger if the histogram bars are also below the zero line. If the MACD crosses down below the Signal line, but the histogram has not confirmed it by producing bars below the zero line, this is still considered a sell signal, but not as strong.