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MACD Histogram: Part One

by on December 16, 2013 5:56 am GMT
 

The moving average convergence-divergence (MACD) indicator was developed by technical analyst Gerald Appel and is one of the building blocks many beginning technicians use in their trading systems. The original MACD used a signal line (a short-term moving average) and price derivative comprised of a longer-dated moving average subtracted by a short-dated moving average.

MACD gave traders the ability to pick out momentum in trending assets. However, the MACD had a weakness, there was no particular limit. It did not give a trader insight to when an asset’s price was overextended. So, traders began to tinker and create versions of the MACD indicator in order to give traders a edge.

The MACD (moving average convergence-divergence) histogram indicator is the creation of Thomas Aspray and has been a trading staple for over 25 years. This indicator is derived from Gerald Appel’s original MACD indicator from the late 1970s, but this updated oscillator is used to anticipate the signal crossover in the MACD. The goal of the MACD histogram is to weed out the lagging moving average and signal crossovers which can alter a trader’s risk-to-return.

A standard MACD set up uses the 12-day exponential moving average (EMA) less the 26-day EMA. The signal line is the 9-day EMA. A bullish crossover is generated when the signal line crosses above the moving averages, while a bearish crossover is the opposite. The histogram plots the difference between the MACD reading and the signal line. The histogram is then positive when the MACD reads above the signal line and negative when the MACD is below.

As the MACD increasing diverges from the signal line, positive histogram values increase. The positive values will decrease when the MACD and signal line converge. Furthermore, the MACD histogram will become negative when the MACD crosses below the zero line and diverges farther from the signal line.

1D Chart of EURUSD featuring MACD Histogram without signal

1D Chart of EURUSD featuring MACD Histogram without signal

Notice the histogram coupled with the traditional MACD crossover and signal lines. The crossovers tend to give a trend signal while the histogram gives an indication on the trend’s strength.

 

1D Chart of EURUSD featuring MACD Histogram and Crossover

1D Chart of EURUSD featuring MACD Histogram and Crossover