Definition and example of the firing line

What is an activation line?

A trigger line is a moving average plotted on the Moving Average Convergence Divergence Indicator (MACD) 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 default trigger line setting, traders can adjust the length of the EMA to suit their trading strategy.

Key takeaways

  • The trigger line is a nine-period EMA of the MACD indicator.
  • The trigger line can be used to generate trade signals when the MACD crosses above or below it.
  • Trading signals are unreliable without confirmation or filtering from other forms of technical analysis or indicators.

How is the activation 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 activation line tell you?

The trigger line provides technical information 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.

These trading signals are generally not used in isolation, instead another filter is applied to the trading signals, such as the direction of the general trend. For example, if the price exceeds the high swing highs and the higher swing lows (an uptrend), buy signals can be used to enter a trade. Sell ​​signals would be used to close the trade.

Since the MACD can cross the trigger multiple times before making a substantial move, getting quality trading signals is more difficult in reality than in theory. Signals can produce profits when the price of a security is in a strong trend, but when the price is not trending strongly, the 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 stay 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 stay in the trade until the MACD crosses below the trigger line. Entering and exiting the market with the signals generated by the trigger line prevents traders from questioning themselves and making discretionary decisions.

However, as stated, other filters are recommended as taking all trading signals from the MACD trigger line could result in significant commissions and losses.

Examples of how to use the activation line

The chart below shows a strong uptrend at Apple Inc. (AAPL). Based on the general uptrend, buy signals could be used to open long positions, while sell signals would close the position.

During the 13-month period, the MACD trigger line signaled multiple long trading opportunities. Several of these proved profitable.

Image by Sabrina Jiang © Investopedia 2021

The indicator will not perform as well in all conditions. Therefore, whenever possible, look for strong trends and soon use the trigger line for trading signals.

The difference between the trigger line (MACD) and the 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 the use of the activation line

In choppy markets, the trigger line can frequently cross the MACD and generate many buy and sell signals. To avoid losing positions, traders should confirm a trigger line crossing with other technical indicators or trend analysis.

MACD is a lagging indicator. Adding a moving average can create more lag between when the price actually drops or reaches and the indicator crosses. Sometimes buy signals are generated after the price has already risen substantially, or sell signals are generated after the price has already fallen significantly.

READ ALSO:  Main companies in the financial services sector
About the author

Mark Holland

Leave a comment: