What is the MACD Histogram? An In-Depth Understanding for Traders

Popular Indicators You Should Know

MACD (Moving Average Convergence Divergence) is not only a natural trend indicator but also effectively measures the strength of price movements (Momentum). It is based on applying two EMAs (Exponential Moving Averages) to compare short-term and long-term price changes.

This indicator was developed by Gerald Appeal in the late 1970s, using the difference between EMA(12) and EMA(26), compared to the Signal Line derived from EMA(9), to track ongoing price trend changes.

MACD Structure: Three Components You Need to Know

Part 1: Main MACD Line

MACD is calculated by subtracting the long-term EMA (26( from the short-term EMA )12). The resulting value clearly indicates the price direction:

• When MACD > 0 (above the Central Line(: short-term average price is higher than long-term, indicating a strong bullish trend
• When MACD < 0 )below the Central Line): short-term average price is lower than long-term, indicating a bearish trend

Beyond direction, the slope of the MACD line also indicates trend strength. If the slope increases significantly (more positive or more negative), it suggests a decisive trend. Conversely, decreasing slope may warn of weakening momentum.

( Part 2: Signal Line )Line of Signal(

The Signal Line is obtained by calculating EMA)9### of the MACD itself. Comparing this line with the main MACD allows for faster change signals:

• If MACD > 0 and Signal Line > MACD: Confirmed bullish trend (Bullish MACD)
• If MACD < 0 and Signal Line < MACD: Confirmed bearish trend (Bearish MACD)

The speed of the Signal Line can be adjusted by changing the EMA period from 9 to 5 or 7 to suit your trading style.

( Part 3: MACD Histogram )Histogram(

MACD Histogram = MACD – Signal Line

This component shows the difference between the two lines, making market conditions easier to read:

• Histogram > 0 )Positive###: MACD is above the Signal Line, indicating an upward trend. The larger the value, the stronger the bullish momentum. If it decreases gradually, it may signal weakening momentum.
• Histogram < 0 (Negative): MACD is below the Signal Line, indicating a downward trend. The more negative, the stronger the bearish trend. If it lessens, it may indicate decreasing selling pressure.
• Histogram = 0 (Critical Point): The crossover point of the two lines. An upward crossover signals a buy, while a downward crossover signals a sell.

Why Use EMA Instead of SMA

Moving Averages come in two main types:

• SMA (Simple Moving Average): Assigns equal weight to all data points, resulting in a smooth line but slower to respond to recent price changes.
• EMA (Exponential Moving Average): Gives more weight to recent prices, allowing faster response to changes.

Since digital asset prices move rapidly, EMA is more suitable as it can signal earlier than SMA.

Example Calculation Using USDCHF Data

Calculating MACD involves the formulas:

EMA(12) = (Price × k) + (Previous EMA × (1 - k))
EMA(26) = (Price × k( + )Previous EMA × (1 - k))
MACD = EMA(12) – EMA(26)
Signal Line = EMA(9( of MACD

where k = 2 / (n + 1)).

Plotting these values over time on a chart reveals the relationship between the lines. When MACD crosses above the Signal Line, it may indicate a trend reversal to bullish. Conversely, crossing below suggests a bearish shift.

What Can MACD Tell Us?

) 1( Trend Indication

The basic idea is that rising prices have a short-term EMA above the long-term EMA, so:

• Uptrend: MACD > 0 )above the Central Line(
• Downtrend: MACD < 0 )below the Central Line(
• Critical Point: MACD = 0 )potential trend change(

) 2### Momentum Measurement)

The slope of the MACD line indicates whether the trend is gaining or losing strength:

• Strong Uptrend: MACD positive and increasing, slope rising
• Strong Downtrend: MACD negative and decreasing, slope rising
• Weakening Uptrend: MACD positive but decreasing
• Weakening Downtrend: MACD negative but decreasing

( 3) Detecting Divergence (Contradiction Signals)

When the price moves in one direction but MACD shows the opposite signal, it indicates MACD Divergence, often a sign of a potential reversal:

• Bearish Divergence: Price makes new highs, but MACD is lower (warning of weakening bullishness)
• Bullish Divergence: Price makes new lows, but MACD is higher ###warning of weakening bearishness)

How to Use MACD for Trading

( Method 1: Zero-Cross )Crossing the Central Line###

The simplest method, waiting for MACD to cross the Central Line:

Buy Signal: When MACD crosses above the Central Line )from MACD < 0 to MACD > 0(
Sell Signal: When MACD crosses below the Central Line )from MACD > 0 to MACD < 0(

) Method 2: MACD Crossover (Crossing Signal Line)

This method provides earlier signals by observing the crossover between MACD and the Signal Line:

Buy Signal: When MACD crosses above the Signal Line ###even if MACD is still negative(
Sell Signal: When MACD crosses below the Signal Line )even if MACD is still positive(

) Method 3: Divergence Trading (Contradiction Signals)

Buy Signal: Price makes a new low, but MACD does not, indicating diminishing selling pressure
Sell Signal: Price makes a new high, but MACD does not, indicating diminishing buying pressure

Combining MACD with Other Tools

Since MACD is a lagging indicator ###responds slowly(, it’s best used with other tools for higher accuracy:

) MACD + RSI (Relative Strength Index)

RSI quickly indicates overbought/oversold conditions, while MACD confirms the trend:

• Use RSI oversold + MACD crossing above the Central Line = strong buy signal
• Use RSI overbought + MACD crossing below the Central Line = strong sell signal

( MACD + Bollinger Bands

Bollinger Bands indicate volatility, while MACD shows trend:

• When Bollinger Bands tighten and MACD crosses above the Central Line = buy signal
• When Bollinger Bands tighten and MACD crosses below the Central Line = sell signal

) MACD + William %Range

William %Range shows overbought/oversold levels, while MACD confirms reversals:

• William %Range at oversold levels ###low( and MACD crossing above the Central Line = buy signal
• William %Range at overbought levels )high( and MACD crossing below the Central Line = sell signal

Limitations to Know

MACD has several important limitations:

• Lagging Indicator: Signals are delayed relative to actual price movements. Zero-Cross is slower than Cross Over.
• False Signals: In markets without clear trends, MACD may generate frequent false signals.
• Divergence Traps: Sometimes divergence signals can last a long time before a real reversal occurs.

Therefore, MACD should not be used alone but combined with other tools and proper risk management.

Summary

MACD Histogram is a powerful indicator but must be used wisely. With a solid understanding of its three components )MACD, Signal Line, Histogram###, you can identify trends, measure momentum, and detect turning points. Practice with a demo account or paper trading to become familiar with this indicator before applying it with real funds.