DEFINITION of Trigger Line
Trigger line refers to a moving-average plotted with the moving average convergence divergence (MACD) indicator that is used to generate buy and sell signals in a security. The trigger line, or signal line, is a nine-period exponential moving average (EMA) of the MACD indicator line used by traders to predict future price trends. Although the nine-period EMA is the trigger line’s default setting, traders can adjust the EMA’s length to suit their trading strategy.
BREAKING DOWN Trigger Line
The trigger line provides technical insight on when to go long or short. Traders look for entries and exits when the trigger line crosses above or below the MACD indicator line. When the MACD crosses above the trigger line, a buy signal is generated, indicating that a trader should purchase the stock. Conversely, if the MACD falls below the trigger line, it represents a bearish trend, where the trader should short the stock. (To learn more about the MACD Indicator, see: A Primer on the MACD.)
In the below example, the arrows show five valid trading signals generated by the red trigger line:
Benefits of Using the Trigger Line
Quick to Respond: The trigger line helps spot possible trend reversals early, which makes it a particularly useful tool for short-term traders. Because the trigger line uses a nine-period EMA, it responds to prices changes relatively quickly. This helps offset the lagging nature of the indicator.
Removes Ambiguity: Using the trigger line makes trading decisions systematic. Traders can remain in a position until the trigger line crosses the MACD 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 second-guessing themselves and making discretionary decisions.
Limitations of Using the Trigger Line
False Signals: 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. For instance, when the MACD crosses above the trigger line, the trader could also require the money flow index (MFI) to be oversold. If the stochastic oscillator and trigger line are used together, traders might need the K line to cross above the D line before the MACD crosses above the trigger line. (For further reading, see: MACD and Stochastic: A Double Cross Strategy.)