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 is a 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 how closely the tops and bottoms of the MACD histogram are to the tops of the Nasdaq 100 e-mini future.
MACD Histogram Buy Signal
When the MACD histogram is below the zero line and begins to converge towards the zero line.
MACD Histogram 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 the buy or sell signals shown with arrows. This is an agressive example. One could wait until the MACD histogram went to zero, but that would be the same signal as the MACD moving average crossover.
The MACD is not only good for buy and sell signals, the MACD can be used for warnings of potential change in the direction of stocks, futures, and currency pairs.
Next Page - MACD Divergences
