MACD-HISTOGRAM

MACD HISTOGRAM
The MACD Histogram is useful for anticipating changes in trend.
Overview
The MACD Histogram (MACD-H) consists of vertical bars showing the difference between the MACD line and its signal line • A change in the MACD-H will usually precede any changes in MACD • Signals are generated by direction, zero line crossovers and divergence from MACD • As an indicator of an indicator, MACD-H should be compared with MACD rather than with the price action of the underlying market.MACD-H is used with MACD as a complementary indicator. Thomas Aspray found that MACD signals often lagged important market moves, especially when applied to weekly charts. He first experimented with changing the moving averages and found that shorter moving averages did indeed speed up the signals. However, he was looking for a means to anticipate MACD crossovers and came up with the MACD Histogram.

Interpretation:
The MACD Histogram represents the difference between MACD and it's signal line (usually the 9-day Exponential Moving Average (EMA) of the MACD). Whenever MACD crosses the signal line, MACD-H crosses the zero line.
• If the MACD line is above the signal line, the histogram is positive, and the bars are drawn above the zero line.
• If the MACD line is below the signal line, histogram is negative, and the bars are drawn below the zero line.Sharp increases in the MACD-H indicate that MACD is rising faster than its 9-day EMA and upward momentum is strengthening. Sharp declines in the MACD-H indicate that MACD is falling faster than its moving average and downward momentum is increasing. Divergences between MACD and MACD-H are the main tool used to anticipate crossovers. A positive divergence in the MACD-H indicates that MACD is strengthening and could be on the verge of a bullish moving average crossover. A negative divergence in the MACD-H indicates that MACD is weakening and can act to foreshadow a bearish moving average crossover in MACD.
SignalsThe main signal generated by the MACD-Histogram is a divergence from MACD followed by a zero-line crossover.
• A bullish signal is generated when a positive divergence forms and there is an upward zero line crossover.
• A bearish signal is generated when there is a negative divergence and a downward zero line crossover.In Technical Analysis of the Financial Markets, John Murphy states that the real value of the MACD-H is spotting when the spread between the two lines is widening or narrowing. When the histogram is above its zero line (positive) but starts to fall, the uptrend is weakening. Conversely, when the histogram is below its zero line (negative) and starts to rise, the downtrend is losing momentum. These turns of the histogram provide early warnings that the current trend is losing momentum, and the buy or sell signal is given when the histogram crosses the zero line. Murphy also advocates a two-tiered approach in order to avoid making trades against the major trend. The weekly MACD-H can be used to generate long-term signals. Then only short-term signals that agree with the major trend are used.
• If the long-term trend is up, only positive divergences with upward zero line crossovers are considered valid for the MACD-H.
• If the long-term trend is down, only negative divergences with downward zero line crossovers are considered valid.Used this way, the weekly signals become trend filters for daily signals. This prevents using daily signals to trade against the overall trend.
Many technical tools/indicators are rejected by traders because they provide signals that, while effective and accurate are too infrequent for active trading. Some of these indicators also seem less effective over a longer period of time, one indicator however, that is especially adaptable to longer time frame of the market timer or position investor-
simply for someone looking to exploit temporarily excessiveness weakness and pessimism in a down market----- might be the MACD (Moving Average Convergence/Divergence)
Alexander Elder in his book Trading for a Living, he notes that MACD-Histogram works in a any timeframe, Weekly, Daily, Intraday The signals of the weekly MACD- Histogram lead to greater price moves than the daily or intraday Indicators MACD- Histogram offers a deeper insight in the balance of power between bulls and bears than the original MACD, it shows not only the bull or Bear is in control but also whether they are growing stronger or weaker. It is one of the best tools available to a market technician. MACD- Histogram gives two type of trading signals; one is common and occurs at every price bar.
The other is rare and occurs only a few times a year in any market, but it is extremely strong When the current bar is higher than the preceding bar, the slope is up, it shows that the bull are in control and it is time to buy when the current bar is lower than the preceding bar , the slope is down, it shows that bears are in control and it is time to be short as indicated in the chart below Elder suggest buying the market when the MACD Histogram stop rising and tick up When the MACD Histogram stop rising and tick down Elder advise going short MACD can as well show the extremely overbought and oversold conditions in the market that leads to dramatic moves to the upside or downside respectively.
Personally, I think MACD-Histgrame is the best and most versatile indicator around.
By observing MACD you can tell 4 things about price action:
• the trend of price action - By observing the relationship of the Fast Line and the Slow Line we can tell the direction of the market. If the Fast Line crosses above the Slow Line the trend is up. This is the premise of a moving average crossover system.
• Divergent situations - By comparing neighboring peaks and valleys of the histogram we can identify areas of regular and hidden divergence. If you do not understand divergence , we will come to that later or use your goggle search to look for it
• Momentum - When the market makes a move the Fast Line and the Slow Line separate. The difference can be seen on the histogram. When this movement subsides the lines come back together and the histogram approaches zero. We can observe the histogram rolling over, or rolling up, towards zero. This is an indication that momentum is drying up.
• Market noise - If the market is going sideways there will be no separation between the Fast Line and the Slow Line. The histogram will necessarily be very close to 0. This is a good time to stay out of the market or look for opportunity when price breaks out of the existing range. • Chart Formations - Patterns such as double tops and bottom,round top and bottom and head and shoulder may be more visible,