MACD indicator - The MACD Histogram as a trading tool

The MACD indicator is an important tool used in both the forex and stock exchange markets. MACD divergence strategy is a tool used in the trading world that can reveal price momentum and help with interpretting price trend and direction. It is a powerful indicator of buying and selling signal.

Before getting into MACD divergence strategy, what exactly is the MACD indicator? MACD stands for Moving Average Covergence/Divergence and is a techinical analysis indicator. It was created by Gerald Appel in the late 1970s.

The MACD shows the difference between two exponentially moving averages (EMA), one fast and one slow, of closing prices. These two lines being derived from historical price movement of the currency or stock you are trading.

The example graph below shows the prices in the upper graph, with the MACD line (blue) in the lower graph. The signal line (red), is another EMA of the MACD line. The difference between the MACD line and its signal line is plotted in a histogram seen in black on the lower graph.

You can vary the periods for the averages, but Appel and many other have experimented with a number of different combinations. The usual set of parameters is written as 12 for the fast EMA, 26 for the slow EMA, and 9 for the signal line periods.

The histogram is the difference between the MACD and its 9-day EMA. It will be positive when MACD is above its 9-day EMA and negative when the MACD is below its 9-day EMA. Increasing price increases the speed of price movement making it stretch in the positive direction. It will stretch in the opposite direction during a declining market when prices start to fall.

So now that you understand the MACD indicator and its histogram, let's talk about MACD divergence.