The MACD Histogram

The Moving Average Convergence/Divergence is a big part of our trading method. The MACD we use is a 7 bar moving average of the difference between a 28 bar moving average and a 14 bar moving average. Its signal line is zero, which is the net value at which the two moving averages cross each other, going either up or down. The really important thing about the MACD is the relative position of the MACD to its signal line from one bar to the next. For our trading method, we are particularly interested in the exact bar at which the convergence/divergence starts to takes place.

The conventional MACD plot is shown in Figure 1.

Figure 1

The MACD is plotted in the top sub-graph with the MACD as a purple and its signal line as a white dotted line. We do not plot the zero line with the MACD (but we do plot the zero line later with the MACD Histogram).

It may not be impossible to see the exact bar at which the convergence/divergence takes place in the conventional MACD plot – but it is very difficult!

Our solution is plot the MACD again in overlay mode, w/o axis value, and displayed as a histogram. The lines of the histogram represent the difference in value between the MACD and its signal line. Red lines are negative numbers, indicating the MACD is below the zero line. Green lines are positive numbers, , indicating the MACD is above the zero line. But what we are interested in is the relative length of adjacent bars. To make that as easy to see as possible, we plot the MACD Histogram over the MACD w/o axis value – making the bars as long as possible.

Note the chart shown in Figure 2.

Figure 2

It is easy to see “peaks” and “valleys” in the histogram. And notice how often a peak or valley aligns well with a following price change. That is why the MACD Histogram is an important part of our trading method.

Along with our SRVs, RMI and Stochastic oscillators, the MACD Histogram enables us to select potentially profitable trades with great confidence. You really ought to get See the Music of the Market and learn the TBL way of short term trading.