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.
Next Page - MACD Divergences
The information above is for informational and entertainment purposes only and does not constitute trading advice or a solicitation to buy or sell any stock, option, future, commodity, or forex product. Past performance is not necessarily an indication of future performance. Trading is inherently risky. OnlineTradingConcepts.com shall not be liable for any special or consequential damages that result from the use of or the inability to use, the materials and information provided by this site. See full disclaimer.