As discussed in the previous post, MACD indicator is used to identify new momentum and trend. MACD consists of faster-moving and slower-moving lines as well as MACD indicator histogram. The default values of MACD indicator are 12, 26, and 9.
What do those values mean? The 12 the faster-moving average, while the 26 is the slower-moving average. Meanwhile, 9 is bar that shows the difference between the two moving averages above. The value is plotted as a vertical line called a histogram. How, let is the role of MACD indicator histogram in trading.
Use of MACD Indicator Histogram
As mentioned above, the histogram refers to the difference in the values of two moving averages (12 and 26). Therefore, it is calculated using a simple formula, as follows:
MACD Histogram = faster-moving value – slower moving value
The histogram shows a positive value when the faster-moving average (12) crosses above the slower one (26). The histogram value is plotted above the zero (0) line. Meanwhile, the MACD histogram is negative when the faster-moving average crosses below the slower one. Then, the histogram is plotted below the 0 line. When the two lines touch each other, the histogram value will be 0 and it is plotted at the 0 line.
How to Interpret the Value of MACD Indicator Histogram
Forex traders can use the information provided by MACD indicator histogram to find out the market trend. Whether the two lines are widening or narrowing matters the most. For instance:
When the histogram value is positive (above the 0 line), but starts to decrease toward the 0 line, it means the uptrend is weakening.
When the indicator histogram is negative (below the 0 line), but stars to rise to 0 line, the downtrend is weakening.
In these two samples of MACD indicator histogram values, the underlying momentum is weakening. It signifies a warning for the trader. They may need to wait before executing buy or sell, since the momentum is not decisive enough.