MACD trading rules

Signal Crossover - As explained earlier, MACD also acts as a momentum indicator. A rising, positive MACD signals that the upside momentum is increasing. Similarly, a falling, negative MACD points to an increasing downside momentum. This means a change in MACD’s direction signals a change in momentum. Plotting a moving average of the MACD line, popularly known as the signal line, is the best way to identify this turnaround in momentum.

Though any short-term moving average can be used for a signal line,the 9-day moving average is the commonly used one. How can one interpret this crossover? As visible from the MACD chart, a bullish crossover occurs when the MACD (blue line) goes above the signal line (red line) and a bearish crossover takes place when the MACD goes below the signal line. To make it clearer, we have marked one bullish crossover with an up-arrow key and one bearish crossover with a down arrow key.

Divergence - The third rule is based on the theory of divergence. Just like other momentum indicators, divergence occurs when the MACD moves in a different direction compared to the price action of the underlying security. A bearish divergence occurs when the MACD starts making lower tops even though the price continues to create higher tops. A bullish divergence, on the other hand, occurs when the MACD starts making higher bottoms despite the price making lower bottoms.


The negative divergence – i.e. lower tops on MACD chart is marked with a falling line and higher tops on price chart with a rising line. This negative divergence shows how the upside momentum is slowing down while the uptrend is still on. Since this fall in momentum can foreshadow a possible trend reversal, traders need to be careful and should avoid taking fresh bullish bets. What they need to do is to take a bearish bet once a sell signal is generated either by signal crossover rule or by zeroline crossover rules.