How to Use the MACD Technical Indicator - Part 3
This is part three of the MACD video series. The speaker explains the advantages of the MACD's histogram, which he considers as another reliable signal.
First, he did a recap of all the points that he has explained in the first two videos. Then he shifted to the histogram, which he thinks is also a powerful indicator. The histogram works the same way as the MACD line when it crosses over the zero line. If the value of the MACD is greater than its 9 day EMA (exponential moving average) the histogram will be above the zero line. If it’s less, then the histogram will be below the zero line.
The speaker explained how the histogram is a good indicator of sharp movements of the momentum, whether it is in a bullish or bearish mode. In another chart he explains how the histogram is able to show a divergence before the MACD line crosses over the zero line, reflecting changes in the 9 day EMA before it actually occurs.
In the third chart he explains how the histogram provides multiple signals - the bullish signal, the bearish signal and the divergence which indicates an imminent change in price action. He also explained how the histogram is an indicator of the MACD itself, by enabling traders to see changes in the MACD before it occurs.
He concludes the video by advising traders to use MACD with other complementing technical indicators.
Quotes from the video:
- The histogram gives us the ability to forecast signals in the MACD before they even happen.
- Movements in histogram are often independent of movements in the MACD itself, and most often changes in the MACD, direction such as here, are often preceded by a divergence in the histogram .
- MACD is not only an indicator of direction but also an indicator of momentum as well .
- MACD should be used in conjunction with other tools; ideally a banded indicator such as Stochastics, RSI, or CCI should be used with MACD to help the trader determine overbought and oversold levels.