Moving Average Convergence Divergence as Histogram

Type

Trend following oscillator that shows the relationship between two moving averages of prices.

History

Thomas Aspray developed the MACD-Histogram in 1986; it was devised in order to solve the problem of the MACD lagging important moves of a security.

What Aspray wanted to do was to anticipate MACD crossovers, what was developed was the MACD-Histogram.

How does it work?

The MACD-Histogram represents the difference between the MACD and the 9-day EMA of the MACD, which is also referred to as the trigger line. The difference is then plotted as a histogram making centreline crossovers and divergences easily identifiable.

A centreline crossover for the MACD-Histogram is the same as a moving average crossover for MACD. If you will recall, a moving average crossover occurs when the MACD moves above or below the signal line.

If the value of the MACD is larger than the value of its 9-day EMA, then the value on the MACD-Histogram will be positive. Conversely, if the value of the MACD is less than its 9-day EMA, then the value on the MACD-Histogram will be negative.

Further increases or decreases in the gap between MACD and its 9-day EMA will be reflected in the MACD-Histogram. Sharp increases in the MACD-Histogram indicate that MACD is rising faster than its 9-day EMA and bullish momentum is strengthening. Sharp declines in the MACD-Histogram indicate that the MACD is falling faster than its 9-day EMA and bearish momentum is increasing.

Trading Signals

The main benefit of the MACD-Histogram is its ability to anticipate MACD signals. Divergences usually appear in the MACD-Histogram before MACD moving average crossovers. Armed with this knowledge, traders and investors can better prepare for potential trend changes.

The MACD-Histogram is an indicator of an indicator, and is therefore further away from the underlying price movement. The greater the distance between indicator and price, the more chance there is of a false signal. Thus, the MACD-Histogram should not be compared directly to the price movement of the security.

Settings

Sharechart Default:  10 period, 5 period, 5 period

Example

Below is the daily chart for Colgate-Palmolive Co. There are quite a few examples of divergence in share price from MACD as histogram indicator.

The setting for the MACD as histogram indicator for the graph above was 26 periods, 12 periods, and 9 periods, as shown below. It can be modified by going to Settings > Indicators > MACD as histogram.