Since the MACD uses 26 and 12 EMA to plot, we shall compare these two EMAs with the MACD indicator to determine how these signals are generated. The MACD is a leading indicator meaning it generates signals that are leading compared to price action as opposed to lagging indicators that lag behind the price.
MACD Buy
A buy signal is generated when there is a MACD fast line crosses above the signal line. However, as with any leading indicator these signals are prone to whipsaws/ fake out signals.
To eliminate the whipsaws it's good to wait for confirmation. The signal is confirmed when the two lines cross above the zero mark, when this happens the buy generated is a reliable trading signal.
In the example below, the Moving average generated a buy, before price started to move up. But it wasn't until the MACD moved above the zero line that the signal was confirmed, and the Moving Averages also gave a crossover signal. From experience its always good to buy after both the MACD lines move above zero.
MACD Sell
A sell signal is generated when there is a MACD fast line crosses below the signal line. However, just like the buy signal, these are also prone to whipsaws/ fake outs. To eliminate the whipsaws its good to wait for confirmation of the signal. The signal is confirmed when the two lines cross below the zero mark, when this happens the sell generated is a reliable trading signal.
In the example below, the Moving average generated a sell confirmed after MACD moved below the zero line at the same time that the Moving Averages gave a crossover signal.
