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MACD Histogram
The MACD Histogram is useful for anticipating changes
in trend.
Overview
- The MACD Histogram (MACD-H) consists of vertical
bars showing the difference between the MACD line and its signal
line
- A change in the MACD-H will usually precede any
changes in MACD
- Signals are generated by direction, zero line crossovers
and divergence from MACD
- As an indicator of an indicator, MACD-H
should be compared with MACD rather than with the price
action of the underlying market. MACD-H is used with MACD
as a complementary indicator.
Thomas Aspray found that MACD signals often
lagged important market moves, especially when applied to weekly charts.
He first experimented with changing the moving averages and found that
shorter moving averages did indeed speed up the signals. However, he
was looking for a means to anticipate MACD crossovers and came up with
the MACD Histogram.
Interpretation
The MACD Histogram represents the difference
between MACD and it's signal line (usually the 9-day Exponential Moving
Average (EMA) of the MACD). Whenever MACD crosses the signal line,
MACD-H crosses the zero line.
- If the MACD line is above the signal line, the
histogram is positive, and the bars are drawn above the zero line.
- If the MACD line is below the signal line, histogram
is negative, and the bars are drawn below the zero line.
Sharp increases in the MACD-H indicate that
MACD is rising faster than its 9-day EMA and upward momentum is strengthening.
Sharp declines in the MACD-H indicate that MACD is falling faster than
its moving average and downward momentum is increasing.
Divergences between MACD and MACD-H
are the main tool used to anticipate crossovers. A positive divergence
in the MACD-H indicates that MACD is strengthening and could be on
the verge of a bullish moving average crossover. A negative divergence
in the MACD-H indicates that MACD is weakening and can act to foreshadow
a bearish moving average crossover in MACD.
Signals
The main signal generated by the MACD-Histogram is a divergence from
MACD followed by a zero-line crossover.
- A bullish signal is generated when a positive divergence
forms and there is an upward zero line crossover.
- A bearish signal is generated when there is a negative divergence
and a downward zero line crossover.
In Technical Analysis of the Financial Markets,
John Murphy states that the real value of the MACD-H is spotting when
the spread between the two lines is widening or narrowing. When
the histogram is above its zero line (positive) but starts to fall, the
uptrend is weakening. Conversely, when the histogram is below its zero
line (negative) and starts to rise, the downtrend is losing momentum.
These turns of the histogram provide early warnings that the current
trend is losing momentum, and the buy or sell signal is given when the
histogram crosses the zero line.
Murphy also advocates a two-tiered approach in order
to avoid making trades against the major trend. The weekly MACD-H can
be used to generate long-term signals. Then only short-term signals that
agree with the major trend are used.
- If the long-term trend is up, only positive divergences
with upward zero line crossovers are considered valid for
the MACD-H.
- If the long-term trend is down, only negative divergences
with downward zero line crossovers are considered valid.
Used this way, the weekly signals become trend filters
for daily signals. This prevents using daily signals to trade against
the overall trend.
Further Information
Also see MACD
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