MACD Histogram Strategy

MACD Histogram Strategy – The Moving Average Convergence Divergence Histogram can assist with taking trades in the direction of the trend.

MACD HISTOGRAM

Created by Thomas Aspray in 1986, the MACD Histogram is a visual indicator of the difference between the MACD line and the Signal line, which is a default 9 period ema of the MACD line. The histogram is an oscillator that moves above and below the zero line, just as the MACD line does.

Keep in mind when using this oscillator, that it takes four mathematical steps from price itself to create the 4th derivative, the histogram: Price => two ema averages => MACD line = Signal line => Histogram. Which means it

lags price quite a bit. But like all derivatives of price, it’s much smoother than price itself.

COMPONENTS

5 minute Chart

MACD Histogram (setting: 12-26-9)

50 SMA of Price

MACD HISTOGRAM STRATEGY SIGNALS

This is a very easy to follow method of day trading stocks that are in a clearly identified trend. The 50 sma is used here to determine trend, and again there’s nothing magical about this number 50. Nor the fact that it’s a simple moving average.

If you did a side by side comparison of a simple or exponential or weighted or any other moving average for this strategy, I’m sure you’d find that there are time periods that each would excel. Same for the amount of periods used.

Newbies tend to be very attentive to exact numbers for indicator strategies. It’s not important. If a concept is going to work, it’s going to work over a range of numbers, not just a single number for each variable.

Don’t get hung up on those kinds of details. But, of course, like I said before, don’t take my word for it, or anybody else’s. Do your own testing to confirm any concept or idea.


Buy Setup: 50 sma is rising

Buy Trigger: MACD Histogram is under zero and rising. Stop can be placed under the entry candle.

Exit: Scalp, profit target or trailing stop


Short Setup: 50 sma is falling

Short Trigger: MACD Histogram is above zero and falling. Stop can be placed above the entry candle.

Exit: Scalp, profit target or trailing stop


EXAMPLE CHART 1

EXAMPLE CHART 2

What is MACD Indicator in Forex

The MACD is one of the most used Forex indicators for technical analysis. The indicator consists of two lines on an area and a histogram.

MACD Trading Indicator

Above you see a zoom-in image of the MACD Forex indicator that shows the way it will look like at the bottom of your chart.

The MACD indicator trading strategy involves making trading decisions based on signals that come from the indicator. The indicator is helpful in recognizing potential price increases and decreases. Traders use the MACD indicator Forex tool to support their Forex strategy and to open trades based on signals.

What is the MACD Definition

MACD is an abbreviation of Moving Average Convergence Divergence. The indicator was developed in 1970 by Gerald Appel to signalize changes in the direction, momentum and the strength of the Forex trends. MACD is a lagging indicator, which means that its signals appear after the event has begun on the chart. In this relation, the tool has trend-confirming character.

Default MACD Indicator Settings for Day Trading

The default MACD settings suggest the usage of two lines and a histogram placed on an area. We will go through each of these elements explaining the Moving Average Convergence Divergence formula. But let’s first have a quick look at the three components of the instrument:

MACD indicator settings

The blue line is called an MACD Line. The red line is the Signal Line. And the bars in the middle of the indicator represent a histogram.

MACD Line Calculation

The most important component of the indicator is the MACD line. This is the faster line of the indicator. The calculation of this line involves two Exponential Moving Averages – a 12-period EMA and a 26-period EMA. The MACD line represents the difference between the two EMAs:

MACD line = 12 EMA – 26 EMA

MACD Signal Line Calculation

The slower line of the MACD indicator calculation is called a signal line. It involves the usage of another Exponential Moving Average. The truth is that the MACD signal line is a 9-period EMA of the MACD line.

Signal Line = 9-period EMA of MACD line

MACD Histogram Explained

MACD histogram calculation is a visualized difference between the two lines of the indicator. This means that you need to subtract the two lines to get the value of the MACD histogram.

MACD Histogram = MACD Line – Signal Line

How to Read MACD Indicator

Now let’s discuss the general MACD indicator how-to-use guide. The tool involves three major signal groups, and we will now go through each one of them.

MACD Crossover

The MACD crossover is the most popular signal related to the indicator. It involves the intersection of the two lines. In this relation, we recognize two types of MACD crossover:

Bullish MACD Crossover – It comes when the MACD line crosses the Signal Line in the bullish direction. This signal alerts that the price of the Forex pair is likely to increase.

Bearish MACD Crossover – It comes when the MACD line crosses the Signal Line in a bearish direction. The bearish MACD cross indicates that the price of the Forex pair is likely to decrease.

MACD Divergence

The MACD analysis involves the recognition of divergence as well. In this relation, there are two types of MACD divergence in Forex – bullish and bearish divergence.

Bullish MACD Divergence – When the bottoms of the price action are decreasing, but the bottoms of the MACD are increasing, we have a bullish divergence. It signalizes that the Forex pair is about to do a bullish run.

Bearish MACD Divergence – When the tops of the price action are increasing, while the tops of the MACD are decreasing, we have a bearish divergence. It indicates that the price might drop on the chart.

Now I will show you an example of a trade I did with the MACD indicator. The video below shows a bullish MACD divergence that I used to open a long trade with the USD/CAD Forex pair. Also, the video shows how to successfully combine the Forex MACD with price action rules. The video includes signals from a Falling Wedge chart pattern.

Gold trading strategy using simple MACD with scary results

This is a very simple yet effective MACD momentum trading strategy for GDXJ (Jr. Gold Miners ETF). Apply the MACD indicator with the classic 12/26/9 setting on GDXJ at the 30-minute interval. Go long when MACD issues a buy signal and go short when MACD issues a sell signal. Take profit = +25%, stop loss = -5%. Got pretty decent results off such a basic strategy already so I was wondering what my fellow Q wizards can do to spice this thing up even more!

MACD Moving Average Crossovers

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