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What is a Signal Line?

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  • Written By: Alexis W.
  • Edited By: Jenn Walker
  • Last Modified Date: 10 September 2016
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Signal lines are used as an investment tool by serious investors and can greatly help by providing fast access to a method of predictions of a stock’s performance. In the investing world, it is often necessary to set up signals that can determine when a stock should be bought or sold rapidly; such signals can help an investor maximize the profit that he or she will recognize from the trade of that stock in a short amount of time, without the potential risk of missing the opportunity entirely. The purpose of a signal line is to help set up quick signals that can allow a trade, purchase, or sale to be triggered automatically without the investor having to be physically present.

A signal line is a type of investing tool that involves mathematically tracking an investment over a specified period of time in order to determine how the stock is performing. Signal lines are often used in tandem with the concept of Moving Average Convergence and Divergence (MACD). This means that, for a period of time that is usually 12 to 26 days, a stock is tracked daily, and the average price is calculated as it comes closer to and further away from the signal line, which will be used to determine when the trade of the stock should be triggered.

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A signal line is often a nine-day Exponential Moving Average (EMA). This means is that it is plotted on a graph next to a nine-day average of the MACD numbers. Once the numbers converge at a certain point, a physical signal is sent to buy or sell a certain stock at a certain price that has been predetermined by analyzing both the EMA and the MACD to create the signal line. The point at which the MACD crosses over the specific line and triggers an action is known as the signal line crossover and is one of the most common signal line transactions.

The process of using MACD and signal lines to determine whether or not a stock should be bought or sold, or at what time to do so, is a highly complex and mathematical process most often used by day traders and other stock professionals. It can also be used by hobbyists and recreational investors to determine whether or not a stock is worth purchasing at a certain point. Any investor would do well to fully understand the process for establishing an MACD or an EMA before deciding to actually buy and sell stocks based on the results of the averages by setting a signal line.

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