welcome to this trading tutorial trading MACD histogram indicator today we're
going to go over the details real quickly of how it's calculated and then
how to treat it when it's helpful and when it is not so the MACD histogram it
treating this thing with Forex futures stocks whatever it's all the same
because it's based on a price action so first of all let's talk about what it
means and when I say what it means that's because it is a mathematical
formula and so let's talk about what it mathematically means this line right
here would I have colored in green that is what's called the MACD line MACD that
stands for moving average Convergence divergence rating but that's the MACD
line now this red line is actually a moving average of the MACD line so the
typical calculations for the MACD line is the 12-day EMA - the 26 day EMA
exponential moving averages and then the signal line is a nine period EMA of the
MACD okay then we'll talk about the histogram here in just a moment now so
if you look at this the MACD lionel's look at that first since that is again
the calculation of the 12 period - the 26 period EMA s what I've done here is
I've put these EMA's up here alright you can see them so the 12 is the light blue
one the 26 is the dark blue one so what you'll notice is that the when there's
no difference between them then the MACD line will hit zero so right here we it
hits zero why because and there's your right that's your zero line right there
because there's no difference between the two moving averages alright now here
it never hits a zero why because these two lines these two moving averages
never hit each other until about right there and then sure enough
it goes back down to zero again so when the two moving averages converge and
they touch then the Greenline MACD line which is the difference between those
two moving averages will go to zero so simple as that
all right so uh now when they are when the MACD link and a lot of Eros here so
when the MACD line the green line is moving up basically what that means is
that these two lines are moving further away from each other so because the 12
period EMA is faster than the 26 period EMA it will accelerate a little faster
and that'll cause this to go up all right and basically what that's
measuring is acceleration so it's often referred to as a momentum indicator but
in my never to be humble opinion that's actually a misnomer it's more
acceleration because momentum implies mass and there's no mass involved in the
equation whatsoever it's simply the difference of the speeds
between the two moving averages so okay there yet that now when they come back
together all right so they're converging here then you'll see the MACD line goes
down right again now the the what's often called the signal line the nine
period moving average of it my rib line really not too much to say about that
that's all there is to it it's a nine period moving average of this some
people use that as kind of a smoothing of the MACD line actually if there's a
lot more we could say about it but not fruit to these purposes so today's
purpose is we want to get to this MACD histogram so what the heck does that
mean that's the black thing down here all right so what this measures is very
simply the difference between these two lines all right so the Green Line MACD
line measures the difference between two moving averages the red line is the
movie 9p9 period EMA of the Green Line but the histogram now this was added by
Thomas aspirate and he added it to provide somewhat of a faster indicator
because since the MACD is based on moving average
is moving average Convergence divergence it's lagging and all moving averages are
having a gain component to them so an attempt to try to speed things up he
created this so basically again it's just measuring the difference between
these two lines now so we see when they cross the histogram goes to zero when
they cross histogram goes to zero when they cross they stream goes to zero so
you got the same principle here now except it's not based on the moving
averages it's based on the MACD and the signal line when one is moving up faster
than the other then the histogram will move up and now sometimes you'll see
that this can be moving up and this can be moving up but if this one's not
moving up as fast then the histogram will actually go down why because the
distance between these two lines is getting more narrow or narrow and then
when they start getting further apart again of course now we're going to the
downside then this will go down but notice how here it's still below it but
now the distance between it starts to shorten up or getting smaller and so
this goes back up okay so that's the basic mathematics of it that's all well
and good but how do we trade this puppy dog okay so what most people do is they
look forward to Virgin says and that can be okay it's something that has to be
done in context so let's talk about that context so here you see you've got a at
this making a lower high price making a lower high so you know should we go
short that it actually be a convergence and the answer is no that wouldn't work
out so good but what about here you got a convergence there as well also not so
good here we've got a convergence going up and here we have a this going up but
here we have this going down now see this is where you could see where Tom's
Ashbury was looking to create something that was faster because here we still
have the MACD line going down but we have the histogram making a higher low
lower low higher low and that's exactly what he wanted
to give a faster signal now the key is again in the context of market is with
the trend right it's with the Travis not against the trend and that is exactly
what the role of this histogram was to do was to give earlier faster signals in
situations like this let me pull up another example for you all right
so here we have a similar situation now we're in a downtrend and we have the
MACD line going up making a higher highs this time but this time we have a lower
high on the histogram so again giving an earlier signal again it is not really i
diversions it is a convergence because both price and the histogram are making
lower high use at the same time so I want to be careful to point this out a
lot of people are always looking for these divergences they can be good
signals in certain contexts on certain situations but don't ignore these
convergences as well they're quite often better they are showing you that the
energy of the market is continuing in the way that it's been going in other
words trade in the direction of the trend don't keep fighting the trend the
problem with divergences is often that they're fighting against the dominant
energy of the market and they can be very short-term signals and that's a big
mistake I see a lot of traders making now let's bring up one last example
before you finish up okay so let's finish with this chart now I switched
markets I went over to the futures market the NQ and I'm using tick charts
and it's just to show that this will work in different markets different time
frames and so forth so what we have here now is we do have a divergence so we
have a lower low price and we have a higher low on the MACD histogram so now
why is this a better signal with the divergence set of a convergence the
reason is very simply because we are now late in a trend so that is the key that
trans your friend until the end as I'm sure you've heard and so the longer a
trend continues the less likely it is to continue so when we're early in
new trend I'm not real keen on divergences I'd rather trade in the
direction of the trend with a convergence but toward the end of at ran
after it's very extended then we know the probabilities are no longer in the
side of the trend the trend has become your enemy and therefore if you want to
look for trend reversal trades that's when you might want to start looking for
divergences so hope this video was helpful for you I've got a bunch of
videos here on YouTube and I also have a free course that I'd make available to
my youtube subscribers so feel free to get that by clicking on the green box in
the top right corner of the video here also by the way in that course it's not
just general information I give you one of my favorite tre the strategies called
the rubberband trade so that includes entries exits all the rules everything
might give to you for free take it start making some money
hopefully if you have any questions you can email me and ask me questions about
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