MACD Histogram

MACD Histogram vs. MACD

A little less known than MACD, but claimed by many to be more useful, is an indicator derived from MACD, the MACD Histogram. Thomas Aspray was reportedly the first to describe MACD Histogram in 1986.

MACD Histogram uses a similar idea as MACD and applies it to MACD itself (it’s like MACD of MACD). The value of MACD Histogram equals the distance between MACD line and Signal line, which is an exponential moving average of MACD line. Therefore MACD Histogram is just a different way of looking at the information already provided by MACD itself.

MACD Histogram in Charts

Naturally the distance between MACD line and Signal line is very small relative to price for most of the time. MACD Histogram is therefore, like MACD itself, displayed in a separate chart under the price chart. As its name suggests, the indicator is usually drawn as a histogram, but there are people who prefer viewing it as a line or steps. Note that in some charting packages the MACD Histogram can have different names, e.g. MACD Diff.

MACD Histogram Settings

In relation to MACD, the MACD Histogram does not have any additional parameters. You only need to set the three period lengths for the moving averages used in the MACD (shorter EMA, longer EMA, and EMA of MACD). The most frequently used periods for these are 12, 26, and 9, respectively.

MACD Histogram Values and Situations

There are no boundaries on the values MACD Histogram can reach, but most of the time it will oscillate very closely around zero. Following are the few basic situations you can identify with MACD Histogram and what each of them means regarding the market’s development.

MACD Histogram is:

  • Positive and rising when MACD line is above Signal line and it is moving further away from it (market’s bullish momentum is accelerating)
  • Positive but falling when MACD line is above Signal line, but they are converging (the bullish momentum in the market is fading)
  • Zero when MACD line is just crossing Signal line
  • Negative and falling when MACD line is below Signal line and is moving further away from it (market’s bearish momentum is accelerating)
  • Negative but increasing when MACD line is below Signal line, but they are converging (the bearish momentum in the market is fading)

If this sounds similar to the interpretation of MACD to you, you’re right. But there is a difference in time perspective and speed at which both indicators reflect trend changes.

There Is No New Information in MACD Histogram

You will not find any new information on the MACD Histogram chart that you couldn’t find on the basic MACD chart. You can see both MACD line and Signal line on the basic MACD chart and of course you can see their distance there too.

After all, when you have MACD displayed, you don’t need to set any additional parameters in order to display MACD Histogram – both indicators work with the same numbers.

Why Look at MACD Histogram Then?

It is quite difficult to observe the developments in the two lines’ distance on the basic MACD chart, as the bar-to-bar differences are very small. MACD Histogram is all dedicated just to plotting this distance and therefore its chart’s scale can be more focused and detailed. As a result, it makes all the little changes more visible and can help you make faster decisions. In sum, MACD Histogram is a kind of zoom on what really matters in the MACD chart.

What MACD Histogram and MACD Have in Common

  • Both oscillate around zero.
  • Both represent a distance between two lines which are trend-following in nature (it is all built around moving averages).
  • When the indicator is rising, it is a signal that bulls are gaining strength vs. the bears, and vice versa.

Differences in Behaviour and Their Interpretation

  • When MACD is at zero, it means that the two exponential moving averages of price are just crossing.
  • When MACD Histogram is at zero, it means that the MACD line is just crossing the Signal line. At this moment, the two exponential moving averages of price can be far away from one another.
  • At one particular moment, MACD can be rising while MACD Histogram can be falling and vice versa. While one is telling you “bullish”, the other can be giving a bearish signal.

So Which One to Trust?

It is all a matter of your perspective. Though both MACD and MACD Histogram are designed to identify whether market is bullish vs. bearish, they focus on slightly different horizon and they react at different speed.

In general, when the market’s sentiment is turning, you first get a signal from the MACD Histogram. When the original momentum starts to fade and MACD line starts approaching Signal line, MACD Histogram reverses. At this moment, MACD itself may still be pointing in the original direction. It may take a few bars until MACD line changes direction too and a few more bars until it crosses Signal line.

MACD Lags behind MACD Histogram

To conclude, MACD Histogram reacts faster to changes in price direction, while MACD lags a bit. Therefore, if you want to pick price reversals and jump on any potential new trend as soon as possible, use the MACD Histogram. The downside is that MACD Histogram changes direction much more often than MACD and you can get a lot of bad signals. Do you want to be the hare or the turtle? Both have advantages and disadvantages.