What is a Trigger Line?

by Investing School on January 13, 2012

In order to understand what a trigger line is you have to understand what the moving average convergence divergence (MACD) theory is. The theory is a popular index used in the technical analysis of short term market momentum. It allows investors to quickly spot increasing short term momentum. Traders watch to see the short term moving average surpass the long term movement average as a signal of upward movement.

The trigger line is also called the signal line. When the trigger line goes above the established MACD line, traders buy, and when the line falls below the MACD line investors sell.
Different formulations are used to determine the value of long and short term averages. The most common default settings are 12 and 26 days. The centerline is calculated by evaluating the difference between a short term moving average and a long term moving average.

The advantage is that this kind of analysis can give traders data which is easy to interpret. Investors can use the information to see if short term trends are moving in their favor. On the down side, the delay between reading the data and making a purchase or sale can mean that the trader is buying when prices are surging and selling when they are dropping. This experience is called ‘whipsawing’ and can occur several times before a trader hits the timing properly.

Even with the potential risks the MCAD is considered a good tool for short term traders. Learning how to read this instrument correctly is an important skill for any investor.

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