MACD Histogram: The Basics

MACD

MACD (Moving Average Convergence/Divergence) is a widely known indicator. Its core idea is measuring the distance between two exponential moving averages with different period lengths.

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

Basic logic of MACD Histogram

MACD Histogram uses a similar idea as MACD and applies it to the MACD itself. It measures the distance between the MACD line and the Signal line (which is an exponential moving average of the MACD line). If you are not familiar with them, you can read more about the MACD basics.

Displaying MACD Histogram in charts

Naturally the distance between the MACD line and the Signal line is very small relative to price for most of the time. MACD Histogram is therefore, like the 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 the MACD line is above the Signal line and it is moving further away from it (market’s bullish momentum is accelerating)
positive but falling when the MACD line is above the Signal line, but they are converging (the bullish momentum in the market is fading)
zero when the MACD line is just crossing the Signal line
negative and falling when the MACD line is below the Signal line and is moving further away from it (market’s bearish momentum is accelerating)
negative but increasing when the MACD line is below the 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. See How MACD Histogram Differs from MACD and Which One to Choose.