MACD Histogram, and How it Works

This indicator works really well at identifying the trend at hand, and letting you know when that trend has reversed. The MACD histogram uses moving averages in its construction. The first step in creating the histogram is to take the difference between 2 moving averages. Once this difference is determined, you then take a moving average of the differences. You then have 2 lines, and the MACD histogram measures the amount of space between the 2 lines. I know this sounds complicated, and it is, but the good thing is that its interpretation is much easier. Below is a chart of GDX, and an MACD histogram beneath.



When the histogram is above the zero line, it means that the bulls are in control, and the trend is up. The opposite is true for when it's below the zero line. In the above chart, I have drawn blue rectangles around the bullish areas. This indicator is also good a picking out divergences. For example, if the price is rising, but the MACD is falling, this indicates that the price is rising but losing momentum.

I use Fibonacci numbers in my MACD, and I have noticed that renowned technical analyst John Murphy does the same. I may talk more about Fibonacci in another post. Anyway, the configuration I have is a little slow at changing when the trend turns, but the number of whipsaws is very small. Therefore, my configuration is better suited for longer term swing traders than for shorter term day traders.