What Is a Trigger Line?
A trigger line is a moving average plotted on the moving average convergence divergence (MACD) indicator that is used to generate buy and sell signals for a security. The trigger line, or signal line, is a nine-period exponential moving average (EMA) of the MACD indicator line. Although the nine-period EMA is the trigger line’s default setting, traders can adjust the EMA’s length to suit their trading strategy.
- The trigger line is a nine-period EMA of the MACD indicator.
- The trigger line can be used used to generate trade signals when the MACD crosses above it or below it.
- Trade signals are not reliable without confirmation or filtering from other forms of technical analysis or indicators.
How Is the Trigger Line Calculated?
The trigger line is a moving average of the MACD (or other indicator) calculation.
Calculate an EMA of the last 'n' values of the indicator to create the trigger line. Nine is a commonly used 'n' value.
What Does the Trigger Line Tell You?
The trigger line provides technical insight on when to go long or short. Traders look for entries and exits when the MACD line crosses the trigger line.
When the MACD crosses above the trigger line, this could be used as a buy signal. Conversely, when the MACD falls below the trigger line, this could be used as a sell or short signal.
Such trade signals are usually not used in isolation, but rather another filter is applied to the trade signals, such as the direction of the overall trend. For example, if the price is making over high swing highs and higher swing lows—an uptrend—then buy signals may be used to enter a trade. Sell signals would be used to close the trade.
Since the MACD may cross the trigger a few times before making a substantial move, getting quality trade signals is harder in reality than in theory. The signals may produce profits when the price of a security is in a strong trend, but when the price is not trending strongly, signals should be treated with caution.
One of the benefits of indicators, and the trigger line, is that they can make trading decisions systematic. Traders can remain in a position until the MACD crosses the trigger line in the opposite direction. For example, if a long position is taken when the MACD crosses above the trigger line, the trader can remain in the trade until the MACD crosses below the trigger line. Entering and exiting the market on signals generated by the trigger line stops traders from second-guessing themselves and making discretionary decisions.
As indicated, though, other filters are recommended, as taking all MACD trigger line trade signals could result in significant commissions and losses.
Examples of How to Use the Trigger Line
The following chart shows a strong uptrend in Apple Inc. (AAPL). Based on the overall uptrend, buy signals could be used to open long positions, while the sell signals would close the position.
Over the 13-month period, the MACD trigger line signaled multiple long trade opportunities. Several of these were profitable.
The indicator won't work so well in all conditions. Therefore, whenever possible, look for strong trends and then use the trigger line for trade signals.
The Difference Between the Trigger Line (MACD) and Signal Line (Stochastic)
The terms are often used interchangeably. Trigger lines or signal lines are moving averages of the underlying indicator. The stochastic oscillator has a signal line similar to the MACD trigger line. The stochastic signal line (D) is a three-period moving average of the stochastic (K).
Limitations of Using the Trigger Line
In choppy markets, the trigger line can frequently crisscross the MACD and generate many buy and sell signals. To avoid getting whipsawed out of positions, traders should confirm a trigger line cross with other technical indicators or trend analysis.
The MACD is a lagging indicator. Adding a moving average to it can create more lag between when price actually bottoms or tops and the indicator has a crossover. Sometimes buy signals are generated once the price has already risen substantially, or sell signals are generated after the price has already fallen significantly.