MACD is one of the most versatile and handy technical indicators that is highly popular amongst pro traders. It comprises a histogram and two plots one is the MACD and the other is the signal line. But here we will discuss how to use the histogram to get reliable BUY/SELL Signals. A MACD Histogram is a bar chart. The slope of the MACD Histogram is very important. This is the best indicator that tells whether bears or bulls are controlling the market. An upward slopping histogram indicates that the bulls are getting stronger while a downward sloping histogram indicates that the bears are getting stronger.
The slope of the price action and the histogram tell whether the trend is going to continue or not. If both are in the same direction, it means the trend will continue and when both are in opposite direction, it means the trend is getting weaker.
The best buy signals occur when the MACD Histogram is below the center line and the slope turns upward. In the same manner, the best sell signals are given when the MACD Histogram is above the center line and the slope turns downward indicating that the bulls have lost control.
So when to go short or long? When the bars on the histogram stop decreasing and start increasing, go short with the stop loss at the last minor high in the price action. When the prices continue to fall, you should replace the initial stop loss with a trailing stop loss that trails behind at the highest price level for the last two bars.
Similarly, when the histogram bars stop decreasing and start increasing, it means time to go long with the stop loss at the last minor low in the price action. When the price action continues to rise, replace this initial stop loss with a trailing stop loss that trails the price action at the lowest price level of the last two price bars.
This MACD Histogram trading strategy does not work well on the lower timeframes like the daily charts where there are too many ups and downs. But it gives very reliable trading signals on the weekly timeframe and above.
The longer the timeframe, the longer the move is likely to continue. Trading with the weekly charts will produce bigger moves as compared to trading with the daily charts. Plus the signals generated on the longer timeframe are much more reliable as compared to the shorter timeframe.
Always confirm the trading signals given by the histogram with the price action. If the prices and the histogram make new lows or new highs together, it means the price action will continue to move in the same direction.
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