MACD Histogram

http://forex-indicators.net/macd/cpage-4

1. MACD Defined
2. Moving Average Crossovers
3. MACD Histograms
4. MACD Divergences 
5.  
6.  
7.  
8.  
9.  
10.  
11. 
    
12. 

The MACD Histogram is simply the difference between the MACD line (blue line) and the MACD signal line (red line). The MACD histogram is illustrated in the chart below of the Nasdaq 100 QQQQ's:

Two important terms are derived from the MACD histogram and are illustrated above in the chart of the QQQQ's:

• Convergence: The MACD histogram is shrinking in height. This occurs because there is a change in direction or a slowdown in the stock, future, bond, or currency trend. When that occurs, the MACD line is getting closer to the MACD signal line.
• Divergence: The MACD histogram is increasing in height (either in the positive or negative direction). This occurs because the MACD is accelerating faster in the direction of the prevailing market trend.

When a stock, future, or currency pair is moving strongly in a direction, the MACD histogram will increase in height. When the MACD histogram does not increase in height or begins to shrink, the market is slowing down and might be warning of a possible reversal. The graph below of the E-mini Nasdaq 100 Index Future shows this phenomenon:
The letter "T" represents when the top or peak of the MACD histogram occurs. In contrast, the letter "B" shows when the bottom of the MACD histogram occurs. Notice in this example how closely the tops and bottoms of the MACD histogram are to the tops of the Nasdaq 100 e-mini future price action.

MACD Histogram Potential Buy Signal

When the MACD histogram is below the zero line and begins to converge towards the zero line.

MACD Histogram Potential Sell Signal

When the MACD histogram is above the zero line and begins to converge towards the zero line.
Note: In the example above, three consecutive days of shrinking MACD histogram from top or bottom served as possible buy or sell signals, these are shown with arrows. This is an agressive example. A trader might wait until the MACD histogram went to zero, but that would be the same signal as the MACD moving average crossover.
In addition to signaling potential buy or sell signals, the MACD could be used for warnings of potential change in the direction of stocks, futures, and currency pairs.

MACD Moving Average Crossovers

1. MACD Defined
2. Moving Average Crossovers
3. MACD Histograms
4. MACD Divergences

The primary method of interpreting the MACD is with moving average crossovers. When the shorter-term 12-period exponential moving average (EMA) crosses over the longer-term 26-period EMA a potential buy signal is generated; this is seen on the Nasdaq 100 exchange traded fund (QQQQ) chart below with the two purple lines.

Remember that the MACD line (the blue line) is created from the 12-period and 26-period EMA. Consequently:

1. When the shorter-term 12-period EMA crosses above the longer-term 26-period EMA, the MACD line crosses above the Zero line.
2. When the 12-period EMA crosses below the 26-period EMA, the MACD line crosses below the Zero line.

Moving Average Crossover Potential Buy Signal

A possible buy signal is generated when the MACD (blue line) crosses above the zero line.

Moving Average Crossover Potential Sell Signal

When the MACD crosses below the zero line, then a possible sell signal is generated.
The prior potential buy and sell signals might get a person into a trade later in the move of a stock or future. Another potential buy and sell signal is shown in the graph below of the Nasdaq 100 exchange traded fund QQQQ:

Most Common MACD Potential Buy and Sell Signals

MACD Potential Buy Signal

A potential buy signal is generated when the MACD (blue line) crosses above the MACD Signal Line (red line).

MACD Potential Sell Signal

Similarly, when the MACD crosses below the MACD Signal Line a possible sell signal is generated.
The MACD moving average crossover is one of many ways to interpret the MACD technical indicator. Using the MACD histogram and MACD divergence warnings are two other methods of using the MACD.

MACD-Histogram

MACD-Histogram

Search ChartSchool

Introduction

Developed by Thomas Aspray in 1986, the MACD-Histogram measures the distance between MACD and its signal line (the 9-day EMA of MACD). Like MACD, the MACD-Histogram is also an oscillator that fluctuates above and below the zero line. Aspray developed the MACD-Histogram to anticipate signal line crossovers in MACD. Because MACD uses moving averages and moving averages lag price, signal line crossovers can come late and affect the reward-to-risk ratio of a trade. Bullish or bearish divergences in the MACD-Histogram can alert chartists to an imminent signal line crossover in MACD. See our ChartSchool article for more on MACD.

Calculation

MACD: (12-day EMA - 26-day EMA) 

Signal Line: 9-day EMA of MACD

MACD Histogram: MACD - Signal Line

Standard MACD is the 12-day Exponential Moving Average (EMA) less the 26-day EMA. Closing prices are used to form the moving averages so MACD. A 9-day EMA of MACD is plotted along side to act as a signal line to identify turns in the indicator. The MACD-Histogram represents the difference between MACD and its 9-day EMA, the signal line. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.

Four Steps Removed

The MACD-Histogram is an indicator of an indicator. In fact, MACD is also an indicator of an indicator. This means that the MACD-Histogram is four steps removed from the price of the underlying security. In other words, it is the fourth derivative of price.

• First derivative: 12-day EMA and 26-day EMA
• Second derivative: MACD (12-day EMA less the 26-day EMA)
• Third derivative: MACD signal line (9-day EMA of MACD)
• Fourth derivative: MACD-Histogram (MACD less MACD signal line)

The base for this indicator is the security's price. It takes four steps to get from the actual price to the MACD-Histogram. Talk about massaging the data. While not necessarily a bad thing, chartists should keep this in mind when analyzing the MACD-Histogram. It is an indicator of an indicator. Therefore, it is designed to anticipate signals in MACD, which in turn is designed to identify changes in the price momentum of the underlying security.

Interpretation

As with MACD, the MACD-Histogram is also designed to identify convergence, divergence and crossovers. The MACD-Histogram, however, is measuring the distance between MACD and its signal line. The histogram is positive when MACD is above its signal line. Positive values increase as MACD diverges further from its signal line (to the upside). Positive values decrease as MACD and its signal line converge. The MACD-Histogram crosses the zero line as MACD crosses below its signal line. The indicator is negative when MACD is below its signal line. Negative values increase as MACD diverges further from its signal line (to the downside). Conversely, negative values decrease as MACD converges on its signal line.
Chart 1 shows Darden Restaurants (DRI) with MACD and the MACD-Histogram. A bearish signal line crossover occurred in late September and this turned the MACD-Histogram negative. A bullish signal line crossover occurred in early December and this turned the MACD-Histogram positive the rest of the month. There was a period of divergence as MACD moved further from its signal line (green line) and a period of convergence as MACD moved closer to its signal line (red line).

Peak-Trough Divergence

The MACD-Histogram anticipates signal line crossovers in MACD by forming bullish and bearish divergences. These divergences signal that MACD is converging on its signal line and could be ripe for a cross. There are two types of divergences: peak-trough and slant. A peak-trough divergence forms with two peaks or two troughs in the MACD-Histogram. A peak-trough bullish divergence forms when MACD forges a lower low and the MACD-Histogram forges a higher low. Well-defined troughs are important to the robustness of a peak-trough divergence. Chart 2 shows Caterpillar with a bullish divergence in the MACD-Histogram. Notice that MACD moved to a lower low in June-July, but the MACD-Histogram formed a higher low (trough). There are two distinct troughs. This bullish divergence foreshadowed the bullish signal line crossover in mid-July and a big rally.
Chart 3 shows Aeropostale (ARO) with a bearish divergence in August-September 2009. MACD moved to a new high in September, but the MACD-Histogram formed a lower high. Notice that there are two definitive peaks (higher) with a dip in between on the MACD-Histogram (red line). The subsequent bearish signal line crossover foreshadowed a sharp decline in the stock.

Slant Divergence

As its name implies, slant divergences form without well-defined peaks or troughs. Instead of two reaction highs, there is simply a slant lower as the MACD-Histogram moves towards the zero line. This slant towards the zero line reflects a convergence between MACD and its signal line. In other words, they are getting closer to each other. Momentum shows strength when MACD is moving away from its signal line and the MACD-Histogram expands. Momentum weakens as MACD moves closer to its signal line and the MACD-Histogram contracts. Contracting MACD-Histogram is the first step towards a signal line crossover.
Chart 4 shows Boeing with a classic slant divergence in the MACD-Histogram. MACD moved sharply lower after the bearish signal line crossover in June 2009. MACD moved to a new low in mid-July, but the MACD-Histogram held well above its prior low. In fact, the MACD-Histogram bottomed towards the end of June and formed a bullish slant divergence. The thick red lines show the distance between MACD and its signal line. It is sometimes hard to gauge distance on the chart so these lines highlight the difference between 26-June and 8-July. This slant divergence foreshadowed the bullish signal line crossover in mid-July and a sharp advance in the stock.
Chart 5 shows Disney (DIS) with a bearish slant divergence in May 2008. Notice how MACD continued to a new high on 16-May, but the MACD-Histogram peaked on 8-May and formed a slant divergence. The advance in MACD was losing momentum and the indicator moved below its signal line to foreshadow a sharp decline in the stock. This chart also shows a nice bullish divergence in March-April.

Conclusions

The MACD-Histogram is an indicator designed to predict signal line crossovers in MACD. By extension, it is designed as an early warning system for these signal line crossovers, which are the most frequent of MACD signals. Divergences in the MACD-Histogram can be used to filter signal line crossovers, which will reduce the number of signals. Even with a filter, the robustness of MACD-Histogram divergences is still an issue. Short and shallow divergences are much more frequent than long and large divergences. In other words, divergences that develop over a few days with shallow movements are generally less robust than divergences that develop over a few weeks with more pronounced movements. The signal line crossover provides the ultimate confirmation, but aggressive traders may try to improve the reward-to-risk ratio by making their move just before the crossover. This is when the MACD-Histogram is as close to the zero line as it can be without actually making a cross, usually between -.20 and +.20.

Using with SharpCharts

MACD comes with the MACD-Histogram, but the MACD-Histogram can be shown as a stand-alone indicator. This makes it much easier to identify divergences and crossovers. The MACD-Histogram can be set as an indicator above, below or behind the price plot of the underlying security. The histogram covers a lot of chart space so it is often best to place it above or below the main window. It is possible to show MACD without the histogram in the main window. Choose MACD as an indicator and change the signal line number from 9 to 1 (9,26,1). This will remove the signal line and the histogram. The signal line can be added separately by clicking the advanced indicator options and adding a 9-day EMA. Click here for a live chart featuring the MACD-Histogram.

Suggested Scans

MACD-Histogram Turns Positive

First, this scan only considers stocks trading above their 200-day moving average, which implies an uptrend overall. Second, the MACD-Histogram moves from negative territory to positive territory. Also, notice that MACD is required to be negative to ensure this upturn occurs after a pullback. This scan is just meant as a starter for further refinement.

[type = stock] AND [country = US] 
AND [Daily SMA(20,Daily Volume) > 40000] 
AND [Daily SMA(60,Daily Close) > 20] 

AND [Daily Close > Daily SMA(200,Daily Close)] 
AND [Yesterday's Daily MACD Hist(12,26,9,Daily Close) < 0] 
AND [Daily MACD Hist(12,26,9,Daily Close) > 0] 
AND [Daily MACD Line(12,26,9,Daily Close) < 0]

MACD-Histogram Turns Negative

First, this scan only considers stocks trading below their 200-day moving average, which implies a downtrend overall. Second, the MACD-Histogram moves from positive territory to negative territory. Also notice that MACD is required to be positive to ensure this downturn occurs after a bounce. This scan is just meant as a starter for further refinement.

[type = stock] AND [country = US] 
AND [Daily SMA(20,Daily Volume) > 40000] 
AND [Daily SMA(60,Daily Close) > 20] 

AND [Daily Close < Daily SMA(200,Daily Close)] 
AND [Yesterday's Daily MACD Hist(12,26,9,Daily Close) > 0] 
AND [Daily MACD Hist(12,26,9,Daily Close) < 0] 
AND [Daily MACD Line(12,26,9,Daily Close) > 0]

For more details on the syntax to use for MACD-Histogram scans, please see our Scanning Indicator Reference in the Support Center.

Further Study

Technical Analysis - Power Tools for Active Investors offers a complete course in market forecasting from the creator of MACD. Short, intermediate and long term strategies are explained with many incorporating MACD. 
e MACD is another popular tool many traders use. The calculation behind the MACD is fairly simple. Essentially, it calculates the difference between a currency's 26-day and 12-day exponential moving averages (EMA). The 12-day EMA is the faster one, while the 26-day is a slower moving average. The calculation of both EMAs uses the closing prices of whatever period is measured. On the MACD chart, a nine-day EMA of MACD itself is plotted as well, and it acts as a signal for buy and sell decisions. The MACD generates a bullish signal when it moves above its own nine-day EMA, and it sends a sell sign when it moves below its nine-day EMA.

The MACD histogram provides a visual depiction of the difference between MACD and its nine-day EMA. The histogram is positive when MACD is above its nine-day EMA and negative when MACD is below its nine-day EMA. If prices are in an uptrend, the histogram grows bigger as the prices start to rise faster, and contracts as price movement begins to slow down. The same principle works in reverse as prices are falling. Refer to Figure 1 for a good example of a MACD histogram in action.

Figure 1: MACD histogram. As price action (top part of the screen) accelerates to the downside, the MACD histogram (in the lower part of the screen) makes new lows.

Source: FXTrek Intellicharts

The MACD histogram is one of the main tools traders use to gauge momentum, because it gives an intuitive visual representation of the speed of price movement. For this reason, the MACD is commonly used to measure the strength of a price move rather than the direction or trend of a currency.

Trading Divergence
A classic trading strategy using a MACD histogram is to trade the divergence. One of the most common setups is to identify points on a chart where the price makes a new swing high or a new swing low but the MACD histogram doesn't, which signals a divergence between price and momentum. Figure 2 depicts a typical divergence trade.

Figure 2: A typical (negative) divergence trade using a MACD histogram. At the right-hand side of the price chart, the price movements make a new swing high, but at the corresponding point on the MACD histogram, the MACD histogram is unable to exceed its previous high of 0.3307. The divergence is a signal that the price is about to reverse at the new high and as such, it is a signal for the trader to enter into a short position.

Source: Source: FXTrek Intellicharts

Unfortunately, the divergence trade is not that reliable or accurate - it fails more times than it succeeds. Prices often have several final volatile bursts up or down that trigger stops and force traders out of position just before the move actually makes a sustained turn and the trade becomes profitable. Figure 3 illustrates a common divergence fakeout, which has frustrated many traders over the years. (Knowing when trends are about to reverse is tricky business, learn more about spotting the trend in Spotting Trend Reversals With MACD.)

Figure 3: A typical divergence fakeout. Strong divergence is illustrated by the right circle (at the bottom of the chart) by the vertical line, but traders who set their stops at swing highs would have been taken out of the trade before it turned in their direction.

Source: Source: FXTrek Intellicharts

One of the reasons that traders often lose money in this type of fakeout is because they enter a position based on a signal from the MACD but end up exiting it based on a move in price. Since the MACD histogram is a derivative of price and not a price itself, this approach mixes the signals used to enter and exit a trade, which is incongruent with the strategy.

Using the MACD Histogram for Both Entry and Exit
To resolve the inconsistency between entry and exit signals, a trader can base both their entry and exit decisions on the MACD histogram. To do so, if the trader was trading a negative divergence then he would continue to take a partial short position at the initial point of divergence, but instead of using the nearest swing high as the stop price, he or she can instead stop out the position if the high of the MACD histogram exceeds the swing high it reached previously. This tells the trader that price momentum is actually accelerating and the trader was wrong on the trade. On the other hand, if a new swing high isn't reached on the MACD histogram, the trader can add to his initial position, continually averaging a higher price for the short position. (Read more specifically about averaging up in our article Is Pressing The Trade Just Pressing Your Luck?)

In effect, this negative divergence strategy requires the trader to average up as prices temporarily move against him or her. Many trading books have called such a technique "adding to your losers". However, in this strategy the trader has a perfectly logical reason for averaging up - the divergence on the MACD histogram indicated that price momentum was waning and the movement may soon reverse. In effect, the trader is trying to call the bluff between the seeming strength of immediate price action and MACD readings that hint at weakness ahead. Still, a well-prepared trader using the advantages of fixed costs in FX, by properly averaging up the trade, can withstand the temporary pressures until price turns in his or her favor. Figure 4 demonstrates this strategy in action.

Figure 4: The chart indicates where price makes successive highs but the MACD histogram does not - foreshadowing the decline that eventually comes. By averaging up his or her short, the trader eventually earns a handsome profit as we see the price making a sustained reversal after the final point of divergence.

Source: Source: FXTrek Intellicharts

Trading forex is rarely black and white. Rules that some traders live by, such as never adding to a losing position, can be used profitably in the right strategy. However, a logical underlying reason should always be established before using such an approach. In the next section, we'll look at the fundamental speed strategy which bases trade decisions on fundamental economic data rather than technicals like the MACD histogram.
U.S. Dollar

Read more: MACD http://www.investopedia.com/walkthrough/forex/intermediate/level4/macd.aspx#ixzz4vDueGF5P
Follow us: Investopedia on Facebook