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This post is all about a MACD histogram strategy for online forex trading.
The MACD is a very useful indicator to help you to determine whether your entry point is a good one or not. In fact, the MACD is such a good indicator that you can actually use it on it’s own to find profitable trades, on all time frames!
MACD Histogram
The MACD is a computation of the difference between two exponential moving averages (EMAs) of closing prices. This difference is charted over time, alongside a moving average of the difference. The divergence between the two is shown as a histogram or bar graph.
Exponential moving averages highlight recent changes in a stock’s price. By comparing EMAs of different periods, the MACD line illustrates changes in the trend of a stock. Then by comparing that difference to an average, an analyst can chart subtle shifts in the stock’s trend.
Since the MACD is based on moving averages, it is inherently a lagging indicator. A MACD histogram only differs from a MACD by the way in which it is illustrated, i.e. as a bar chart above and below a zero line (histogram) rather than two separate moving averages crossing through each other above and below a zero line.
The reason why I am fond of the MACD histogram is because it is very clear and easy to interpret and base your trades on.
MACD Histogram Strategy
If you want to know how to use the MACD histogram as part of a profitable trading strategy then read on carefully.
This MACD histogram strategy revolves around taking a long position when the MACD histogram crosses over the zero line from the downside and taking a short position when the MACD histogram crosses below the zero line from the upside.
Purely trading on this MACD histogram strategy alone works better on smaller time frames like 15 minute and hourly charts, but it can be a useful helping tool for longer-term trades in combination with other indicators or methods.
Below I’ve got 3 different time frame charts of Eur/Jpy: 4-hourly, daily and 15 minutes. These charts all contain the MACD histogram indicator and I’ve put various vertical red lines on the charts to indicate entry points for this strategy. Click on any of the charts for a larger view.
By looking carefully at the above charts you should be able to notice 2 things:
1- Just as with all indicators or strategies, the MACD histogram strategy does not work 100% of the time. Sometimes there are crosses above and below the zero line that don’t produce the expected upside or downside movement in the price action. This is why you still need to apply your strict money-management rules when trading the MACD histogram strategy. Always use a stop loss and keep your risk level per trade limited.
2- Trading purely on the MACD histogram alone, it tends to give better entry points on shorter-term time frames like 15 minute charts. You can see that it works on longer term charts too (4 hour and daily) but since the MACD is a lagging indicator I find that the MACD histogram works better on longer time frames as a confirmation of your other analysis tools.
I.e. you use other strategies to determine your entry point and you just use the MACD histogram to confirm those entry points. (If you are shorting make sure the MACD histogram is below the zero line and if you are going long make sure the MACD histogram is above the zero line).
FILED UNDER: MACD HISTOGRAM
