MACD histogram meaning, strategy, divergence and crossover
Remember, divergence is an imperfect tool that may provide beneficial insight into some trades but not others. Therefore, it is essential to understand its weaknesses, as well as compensate for its shortcomings by analyzing price action. Indeed, using a divergence signal as a forecasting tool can be relatively unreliable. A divergence trade is not as error-free as it appears in hindsight since past data will only include successful divergence signals.
If prices generally move to the side when they stay within a range between support and resistance. MACD tends to drift toward the zero line because there is no up or down trend—where the moving average works best. A crossover occurs when the signal and MACD line cross each other. The MACD generates a bullish signal when it moves above its own nine-day EMA and sends a sell signal when it moves below its nine-day EMA.
How to trade with MACD indicator
See Indicator Panel for directions on how to set up an indicator. MACD Divergences are suitable for trading trending stocks that undergo regular corrections. They would obviously be unsuitable for trading hot, trending stocks like Nvidia below that have few corrections.
- When MACD is negative and the histogram value is decreasing, then downside momentum is increasing.
- Using a +2 SD, we multiply the SD by 2 and add it to the average.
- A crossover occurs when the signal and MACD line cross each other.
- One is free to change the 12 days, and 26 day EMA to whatever time frame one prefers.
- Because there are two moving averages with different “speeds”, the faster one will obviously be quicker to react to price movement than the slower one.
- Traders would want to reduce long positions near the peaks and add to short positions, while reducing short positions near the lows and add to long positions.
These indicators both measure momentum in a market, but because they measure different factors, they sometimes give contrary indications. Either indicator may signal an upcoming trend change by showing divergence from price . The black line is the MACD line, the difference between the two moving averages, which has been rising since the market made a low in March. The red line is the signal line, the nine period EMA of the MACD line. The blue histogram shows us the difference between the MACD line and the signal line.
How to Use the MACD Indicator
The MACD values for a $20 stocks may range from -1.5 to 1.5, while the MACD values for a $100 may range from -10 to +10. It is not possible to compare MACD values for a group of securities with varying prices. If you want to compare momentum readings, you should use the Percentage Price Oscillator , instead of the MACD. Like any oscillator or indicator, the MACD has drawbacks and risks.
Although it is an oscillator, it is not typically used to identify over bought or oversold macd interpretation conditions. It appears on the chart as two lines which oscillate without boundaries.