Introduction to the MACD Histogram Indicator
The Moving Average Convergence and Divergence (MACD) indicator is a classic technical indicator which many traders use for trend reversal trade setups either based on crossovers or divergences.
The MACD Histogram indicator is a variation of the MACD which simplifies this trading method.
What is the MACD Histogram Indicator?
The MACD Histogram indicator is a modified version of the traditional MACD indicator.
The MACD is an oscillator type of technical indicator, which means it can also be used for divergence trading setups.
The MACD Histogram indicator has been modified so that it would automatically detect divergences and provide trade signals based on such setups.
How the MACD Histogram Indicator Works?
The MACD Histogram indicator plots two lines. The first line would be the MACD line. It is the difference between two Exponential Moving Average (EMA) lines. The second line would be the signal line, which is a Simple Moving Average (SMA) derived from the MACD line. It also plots histogram bars, which represent the difference between the MACD line and the signal line.
This indicator also identifies major peaks and dips both on price action and the MACD line. Based on this, the indicator would then identify divergences. It plots dotted lines to represent a hidden divergence, and solid lines to represent a regular divergence. It plots the lines below price to indicate a bullish divergence, and above price to indicate a bearish divergence.
It also plots arrows on the indicator window pointing the direction of the reversal.
How to use the MACD Histogram Indicator for MT4
The MACD Histogram indicator can be used as a trend reversal signal indicator using two methods.
The classic MACD method would be based on the crossing over of the MACD line and the signal line, which would be confirmed by the histogram bars shifting from positive to negative or vice versa.
The second method would be based on divergences. This would be based on the arrow signals plotted by the indicator, as well as the divergence lines identified by the indicator. This signal should also be visually confirmed by the trader and works best when in confluence with other trade setups.
Buy Trade Setup
When to Enter?
Wait for the MACD Histogram indicator to plot on the indicator window an arrow pointing up and lines below price action and the MACD line indicating a bullish divergence signal. Open a buy order if the signal is in confluence with a bullish reversal candlestick pattern. Set the stop loss below the pattern.
When to Exit?
Set the take profit target at the next resistance level and allow price to reach it.
Sell Trade Setup
When to Enter?
Wait for the MACD Histogram indicator to plot on the indicator window an arrow pointing down and lines above price action and the MACD line indicating a bearish divergence signal. Open a sell order if the signal is in confluence with a bearish reversal candlestick pattern. Set the stop loss above the pattern.
When to Exit?
Set the take profit target at the next support level and allow price to reach it.
Conclusion
Divergences based on the MACD is a working trading strategy that many traders use. This indicator simplifies the process by automatically identifying possible divergence setups.
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