Thomas Aspray
found that MACD signals often lagged important market
moves, especially when applied to weekly charts.
He first experimented with changing the moving averages
and found that shorter moving averages did indeed
speed up the signals. However, he was looking for
a means to anticipate MACD crossovers and came up
with the MACD Histogram.
Interpretation
The MACD
Histogram represents the difference between MACD
and it's signal line (usually the 9-day Exponential
Moving Average (EMA) of the MACD). Whenever MACD
crosses the signal line, MACD-H crosses the zero
line.
- If the MACD line
is above the signal line, the histogram is positive,
and the bars are drawn above the zero line.
- If the MACD line
is below the signal line, histogram is negative,
and the bars are drawn below the zero line.
Sharp increases
in the MACD-H indicate that MACD is rising faster
than its 9-day EMA and upward momentum is strengthening.
Sharp declines in the MACD-H indicate that MACD
is falling faster than its moving average and downward
momentum is increasing.
Divergences
between MACD and MACD-H are the main tool used to
anticipate crossovers. A positive divergence in
the MACD-H indicates that MACD is strengthening
and could be on the verge of a bullish moving average
crossover. A negative divergence in the MACD-H indicates
that MACD is weakening and can act to foreshadow
a bearish moving average crossover in MACD.
Signals
The main
signal generated by the MACD-Histogram is a divergence
from MACD followed by a zero-line crossover.
- A bullish signal
is generated when a positive divergence
forms and there is an upward zero line
crossover.
- A bearish signal
is generated when there is a negative
divergence and a downward zero line crossover.
In Technical
Analysis of the Financial Markets, John Murphy
states that the real value of the MACD-H is spotting
when the spread between the two lines is
widening or narrowing. When the histogram is above
its zero line (positive) but starts to fall, the
uptrend is weakening. Conversely, when the histogram
is below its zero line (negative) and starts to
rise, the downtrend is losing momentum. These turns
of the histogram provide early warnings that the
current trend is losing momentum, and the buy or
sell signal is given when the histogram crosses
the zero line.
Murphy also
advocates a two-tiered approach in order
to avoid making trades against the major trend.
The weekly MACD-H can be used to generate long-term
signals. Then only short-term signals that agree
with the major trend are used.
- If the long-term
trend is up, only positive divergences
with upward zero line crossovers are
considered valid for the MACD-H.
- If the long-term
trend is down, only negative divergences
with downward zero line crossovers are
considered valid.
Used this
way, the weekly signals become trend filters for
daily signals. This prevents using daily signals
to trade against the overall trend.
Further
Information
Also see
MACD
