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

MACD Histogram Strategy on chart of FCX

EXAMPLE CHART 2

MACD indicator on ten minute chart

EXAMPLE CHART 3

MACD Histogram with moving average of price


The MACD Histogram can also be used to spot both divergences and reverse or hidden divergences as in the stock chart below.

But, it tends to give even more false signals than it's brother the MACD line.


Reverse Divergence on MACD Histogram