Previously I have mentioned MACD indicator, now lets familiarize ourselves with MACD histogram. But before going there, remind yourself what MACD indicator was - „MACD is a variation of the price oscillator, it is calculated by taking the difference between two exponentially smoothed moving averages of 12 and 26 days. The MACD line is the differences between the two averages – longer one is subtracted from the shorter one. Then a moving average of 9 periods is calculated of this differential and this is called the signal line. If the MACD line crosses above or below the signal line, buy or sell signal is generated.”
However, the MACD indicator tends to follow price movements and does not help us predict them. To help us take advantage from the MACD indicator, MACD histogram has been developed. MACD histogram plots the distance between MACD and its signal line and this helps us find possible price changes in advance. Note though that MACD histogram still should be used in addition to other indicators and observation not all by itself. And like with Parabolic SAR you should use MACD only in trending markets.
When following MACD histogram, you should go long when MACD Histogram goes up below 0 and go short when it goes down above zero. And like Michael Jenkins said – you should trade only in the direction of the trend.
