MACD-Histogram

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technical_indicators:macd-histogram [2019/06/24 19:39]
127.0.0.1 external edit
technical_indicators:macd-histogram [2023/07/17 00:18] (current)
jayanthi [MACD Histogram FAQs]
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 ====== MACD-Histogram ====== ====== MACD-Histogram ======
  
-===== Introduction ​=====+===== What Is the MACD Histogram? ​=====
  
 Developed by Thomas Aspray in 1986, the MACD-Histogram measures the distance between MACD and its signal line (the 9-day EMA of MACD). Like MACD, the MACD-Histogram is also an oscillator that fluctuates above and below the zero line. Aspray developed the MACD-Histogram to anticipate signal line crossovers in MACD. Because MACD uses moving averages and moving averages lag price, signal line crossovers can come late and affect the reward-to-risk ratio of a trade. Bullish or bearish divergences in the MACD-Histogram can alert chartists to an imminent signal line crossover in MACD. See our [[:​technical_indicators:​moving_average_convergence_divergence_macd|ChartSchool article]] for more on MACD.  Developed by Thomas Aspray in 1986, the MACD-Histogram measures the distance between MACD and its signal line (the 9-day EMA of MACD). Like MACD, the MACD-Histogram is also an oscillator that fluctuates above and below the zero line. Aspray developed the MACD-Histogram to anticipate signal line crossovers in MACD. Because MACD uses moving averages and moving averages lag price, signal line crossovers can come late and affect the reward-to-risk ratio of a trade. Bullish or bearish divergences in the MACD-Histogram can alert chartists to an imminent signal line crossover in MACD. See our [[:​technical_indicators:​moving_average_convergence_divergence_macd|ChartSchool article]] for more on MACD. 
  
-===== Calculation ​=====+===== How Do You Calculate the MACD Histogram? ​=====
  
 <​code>​ <​code>​
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 {{:​technical_indicators:​macd-histogram:​macdh-0-qqqqexam.png|MACD - Example}} {{:​technical_indicators:​macd-histogram:​macdh-0-qqqqexam.png|MACD - Example}}
  
-===== Four Steps Removed =====+===== How Is the MACD Four Steps Removed ​From a Stock'​s Price? ​=====
  
 The MACD-Histogram is an indicator of an indicator. In fact, MACD itself is an indicator of an indicator. This means that the MACD-Histogram is four steps removed from the price of the underlying security. In other words, it is the fourth derivative of price. ​ The MACD-Histogram is an indicator of an indicator. In fact, MACD itself is an indicator of an indicator. This means that the MACD-Histogram is four steps removed from the price of the underlying security. In other words, it is the fourth derivative of price. ​
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 The base for this indicator is the security'​s price. It takes four steps to get from the actual price to the MACD-Histogram. Talk about massaging the data. While not necessarily a bad thing, chartists should keep this in mind when analyzing the MACD-Histogram. It is an indicator of an indicator. Therefore, it is designed to anticipate signals in MACD, which in turn is designed to identify changes in the price [[:​technical_indicators:​rate_of_change_roc_and_momentum|momentum]] of the underlying security. ​ The base for this indicator is the security'​s price. It takes four steps to get from the actual price to the MACD-Histogram. Talk about massaging the data. While not necessarily a bad thing, chartists should keep this in mind when analyzing the MACD-Histogram. It is an indicator of an indicator. Therefore, it is designed to anticipate signals in MACD, which in turn is designed to identify changes in the price [[:​technical_indicators:​rate_of_change_roc_and_momentum|momentum]] of the underlying security. ​
  
-===== Interpretation ​=====+===== How Do You Interpret the MACD Histogram? ​=====
  
 As with MACD, the MACD-Histogram is also designed to identify convergence,​ divergence and crossovers. The MACD-Histogram,​ however, is measuring the distance between MACD and its signal line. The histogram is positive when MACD is above its signal line. Positive values increase as MACD diverges further from its signal line (to the upside) and decrease as MACD and its signal line converge. The MACD-Histogram crosses the zero line as MACD crosses below its signal line. The indicator is negative when MACD is below its signal line. Negative values increase as MACD diverges further from its signal line (to the downside). Conversely, negative values decrease as MACD converges on its signal line. As with MACD, the MACD-Histogram is also designed to identify convergence,​ divergence and crossovers. The MACD-Histogram,​ however, is measuring the distance between MACD and its signal line. The histogram is positive when MACD is above its signal line. Positive values increase as MACD diverges further from its signal line (to the upside) and decrease as MACD and its signal line converge. The MACD-Histogram crosses the zero line as MACD crosses below its signal line. The indicator is negative when MACD is below its signal line. Negative values increase as MACD diverges further from its signal line (to the downside). Conversely, negative values decrease as MACD converges on its signal line.
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 Chart 1 shows Darden Restaurants (DRI) with MACD and the MACD-Histogram. A bearish signal line crossover occurred in late September, turning the MACD-Histogram negative. A bullish signal line crossover occurred in early December, turning the MACD-Histogram positive for the rest of the month. There was a period of divergence as MACD moved further from its signal line (green line) and a period of convergence as MACD moved closer to its signal line (red line). Chart 1 shows Darden Restaurants (DRI) with MACD and the MACD-Histogram. A bearish signal line crossover occurred in late September, turning the MACD-Histogram negative. A bullish signal line crossover occurred in early December, turning the MACD-Histogram positive for the rest of the month. There was a period of divergence as MACD moved further from its signal line (green line) and a period of convergence as MACD moved closer to its signal line (red line).
  
-===== Peak-Trough Divergence =====+===== How Do You Interpret ​Peak-Trough Divergence ​Using the MACD Histogram? ​=====
  
 The MACD-Histogram anticipates signal line crossovers in MACD by forming bullish and [[:​glossary_b#​bearish_divergence|bearish divergences]]. These divergences signal that MACD is converging on its signal line and could be ripe for a cross. There are two types of divergences:​ peak-trough and slant. A peak-trough divergence forms with two peaks or two troughs in the MACD-Histogram. A peak-trough bullish divergence forms when MACD forges a lower low and the MACD-Histogram forges a higher low. Well-defined troughs are important to the robustness of a peak-trough divergence. Chart 2 shows Caterpillar with a bullish divergence in the MACD-Histogram. Notice that MACD moved to a lower low in June-July, but the MACD-Histogram formed a higher low (trough). There are two distinct troughs. This bullish divergence foreshadowed the bullish signal line crossover in mid-July and a big rally. ​ The MACD-Histogram anticipates signal line crossovers in MACD by forming bullish and [[:​glossary_b#​bearish_divergence|bearish divergences]]. These divergences signal that MACD is converging on its signal line and could be ripe for a cross. There are two types of divergences:​ peak-trough and slant. A peak-trough divergence forms with two peaks or two troughs in the MACD-Histogram. A peak-trough bullish divergence forms when MACD forges a lower low and the MACD-Histogram forges a higher low. Well-defined troughs are important to the robustness of a peak-trough divergence. Chart 2 shows Caterpillar with a bullish divergence in the MACD-Histogram. Notice that MACD moved to a lower low in June-July, but the MACD-Histogram formed a higher low (trough). There are two distinct troughs. This bullish divergence foreshadowed the bullish signal line crossover in mid-July and a big rally. ​
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 {{:​technical_indicators:​macd-histogram:​macdh-05-disbedv.png|MACD-Histogram - Chart 5}}  ​ {{:​technical_indicators:​macd-histogram:​macdh-05-disbedv.png|MACD-Histogram - Chart 5}}  ​
  
-===== Conclusion ​=====+===== The Bottom Line =====
  
 The MACD-Histogram is an indicator designed to predict signal line crossovers in MACD. By extension, it is designed as an early warning system for these signal line crossovers, which are the most frequent of MACD signals. Divergences in the MACD-Histogram can be used to filter signal line crossovers, which will reduce the number of signals. Even with a filter, the robustness of MACD-Histogram divergences is still an issue. Short and shallow divergences are much more frequent than long and large divergences. In other words, divergences that develop over a few days with shallow movements are generally less robust than divergences that develop over a few weeks with more pronounced movements. The signal line crossover provides the ultimate confirmation,​ but aggressive traders may try to improve the reward-to-risk ratio by making their move just before the crossover. This is when the MACD-Histogram is as close to the zero line as it can be without actually making a cross, usually between -.20 and +.20.  The MACD-Histogram is an indicator designed to predict signal line crossovers in MACD. By extension, it is designed as an early warning system for these signal line crossovers, which are the most frequent of MACD signals. Divergences in the MACD-Histogram can be used to filter signal line crossovers, which will reduce the number of signals. Even with a filter, the robustness of MACD-Histogram divergences is still an issue. Short and shallow divergences are much more frequent than long and large divergences. In other words, divergences that develop over a few days with shallow movements are generally less robust than divergences that develop over a few weeks with more pronounced movements. The signal line crossover provides the ultimate confirmation,​ but aggressive traders may try to improve the reward-to-risk ratio by making their move just before the crossover. This is when the MACD-Histogram is as close to the zero line as it can be without actually making a cross, usually between -.20 and +.20. 
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 </​code>​ </​code>​
  
-For more details on the syntax to use for MACD-Histogram scans, please see our [[docs>scans:​indicators#​macd_histogram_macd_hist|Scan Syntax Reference]] in the Support Center.+For more details on the syntax to use for MACD-Histogram scans, please see our [[https://​support.stockcharts.com/​doku.php?​id=scans:​indicators#​macd_histogram_macd_hist|Scan Syntax Reference]] in the Support Center. 
 + 
 +===== MACD Histogram FAQs ===== 
 + 
 +==== What is meant by the MACD-Histogram being "four steps removed"​ from the price of a security? ==== 
 +This means that the MACD-Histogram is an indicator of an indicator, with four steps between it and the actual price. These steps are: 12-day EMA and 26-day EMA, MACD (12-day EMA minus the 26-day EMA), MACD signal line (9-day EMA of MACD), and MACD-Histogram (MACD less MACD signal line). 
 + 
 +==== What role does the MACD-Histogram play in analyzing price action? ==== 
 +The MACD-Histogram serves as an early warning system for MACD signal line crossovers, which are the most frequent MACD signals. It helps to predict potential shifts in the market and assist traders in making informed decisions. 
 + 
 +==== How reliable are divergences in the MACD-Histogram?​ ==== 
 +While divergences can be used to filter signal line crossovers, the robustness of MACD-Histogram divergences is still an issue. Short and shallow divergences are much more frequent than long and large divergences. Divergences that develop over a few days with shallow movements are generally less robust than divergences that develop over a few weeks with more pronounced movements. 
 + 
 +==== What is a slant divergence in the MACD-Histogram?​ ==== 
 +Slant divergences form without well-defined peaks or troughs. Instead, the divergence between a stock’s price and the MACD histogram is visible through a slant in the price action. 
 + 
 +==== How might a trader make an aggressive entry based on the MACD-Histogram?​ ==== 
 +While the signal line crossover provides the ultimate confirmation,​ aggressive traders may try to improve the reward-to-risk ratio by making their move just before the crossover. This is when the MACD-Histogram is as close to the zero line as it can be without actually making a cross, usually between -0.20 and +0.20.