When the MACD black line crosses above or below the MACD signal grey line, it is known as a cross or crossover. When the MACD black line crosses above the signal grey line, it is supporting a long position. And when MACD black line crosses below the signal grey line, it is supporting a short position.
The crossover of the MACD line and the trigger line close to the zero line provides information whether the trigger is in the direction of the current trend. A cross of the black line below the gray line that occurs below the zero line is a sell signal in the direction of the current trend. Whereas the cross of the black line above the gray line below the zero line is a counter trend buy signal. When the black line crosses above the grey line above the zero line, it is a trend buy signal and when the black line crosses below the grey line above the zero line, it is a counter trend sell signal.
Another way to use MACD is to get signals called Divergence. A divergence occurs when the price is going in one direction and MACD is not confirming that direction. When the price action is making lower lows and the MACD is making higher lows, it is known as a Positive Divergence. Similarly, when price action is making higher lows and the MACD is making lower lows, it is known as a Negative Divergence.
Divergence over a shorter period of time is considered to be a much stronger signals as compared to the divergence on the longer period of time. Markets exhibit divergence before taking a turn but also before normal consolidations.
There is also a divergence between the MACD histogram and the price that is as significant as the divergence between the MACD and the price action. The important question that comes to our mind is that which of the two divergences is more important. Short term divergence generally shows more early on the histogram and can be more significant.
Whatever, when trading, first try to determine the current trend. Then determine whether MACD is supporting this trend direction. The momentum on MACD histogram should be on the same side as the trade. When you see the momentum waning or a MACD cross, exit your position.
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