MACD generates signals from three main sources:
• Moving average crossover
• Centerline crossover
• Divergence

Crossover of fast and slow lines The MACD proves most effective in wide-swinging trading markets. We will first consider the use of the two MACD lines. The signals to go long or short are provided by a crossing of the fast and slow lines. The basic MACD trading rules are as follows:

• Go long when the fast line crosses above the slow line.
• Go short when the fast line crosses below the slow line.

These signals are best when they occur some distance above or below the reference line. If the lines remain near the reference line for an extended period as usually occurs in a sideways market, then the signals should be ignored.

Center line crossover

A bullish centerline crossover occurs when MACD moves above the zero line and into positive territory. This is a clear indication that momentum has changed from negative to positive or from bearish to bullish. After a positive divergence and bullish moving average crossover, the centerline crossover can act as a confirmation signal. Of the three signals, moving average crossover are probably the second most common signals.

A bearish centerline crossover occurs when MACD moves below zero and into negative territory. This is a clear indication that momentum has changed from positive to negative or
from bullish to bearish. The centerline crossover can act as an independent signal, or confirm a prior signal such as a moving average crossover or negative divergence. Once MACD crosses into negative territory, momentum, at least for the short term, has turned bearish.

Divergence

An indication that an end to the current trend may be near occurs when the MACD diverges from the security. A positive divergence occurs when MACD begins to advance and the security is still in a downtrend and makes a lower reaction low. MACD can either form as a series of higher lows or a second low that is higher than the previous low. Positive divergences are probably the least common of the three signals, but are usually the most reliable and lead to the biggest moves.

A negative divergence forms when the security advances or moves sideways and MACD declines. The negative divergence in MACD can take the form of either a lower high or a
straight decline. Negative divergences are probably the least common of the three signals, but are usually the most reliable and can warn of an impending peak.

To Summarize

• The MACD is a hybrid trend following and trend leading indicator.
• The MACD consists of two lines; a fast line and a slow ‘signal’ line.
• A long position is indicated by a cross of the fast line from below to above the slow line.
• A short position is indicated by a cross of the fast line from above to below the slow line.
• MACD should be avoided in trading markets
• The MACD is useful for determining the presence of divergences with the price data.