Crossover Signals

This technique resembles the double crossover method of generating signals when using two moving averages. The MACD indicator reduces the lag inherent in using moving averages alone. In this example we will apply the signals as an automatic trading strategy, without any analysis.

• A buy signal is generated when the fast line crosses above the signal line.
• A sell signal is generated when the faster line crosses below the signal line.

1. Sell Setup - There is a buy signal for the Dollar in the middle of September (i) when the MACD line crosses above the signal line. It is followed by a sell signal in the middle of October (ii). These two trades (buying then selling) might not have made much of a gain (and possibly even a loss), but they do nonetheless set one up to be in a good position for the upcoming downtrend.


2. Potential Gains on Trending Market (& Whipsaw) - A trader that shorts the Dollar during the October (ii) sell signal would ride the appreciation of the Yen until December (v) when there is the next (true) buy signal for the Dollar. However there is a whipsaw beforehand.


3. Whipsaw - In November (iii & iv) there are misleading buy and sell signals. When using indicators that use exponential moving averages a trader needs to always be concerned about dramatic rises and falls in price in a single day as it skews the data used in calculating the averages. These types of moves are usually brought about because of some news event and can produce “noise.” If the trader was patient he would see that the one session upswing was met by just as dramatic a downswing within two sessions and thus avoided the “whipsaw.” This is easy to say after the fact, therefore it is a trader's ability to gauge and withstand whipsaws that makes one a good or poor technical trader. If one is following the automatic trading technique they would lose money on the whipsaw.

If one is a novice trader and follows the whipsaw or is more experienced and doesn't, both are in a position to collect the rest of the down movement from (iv) to (v).

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