In this section You will learn –
The Moving Average Convergence Divergence Indicator or MACD as it is known is mostly used as a trending indicator.
It helps traders determine –
Although it lags behind price, it gives the trader the possibility of entering a trend early on and can at times help a trader exit the market before the trend reverses.
The three components that make up the MACD. The MACD indicator comprises three separate readings, which appear together in a box underneath the price chart: a MACD line, a signal line and a histogram that shows the difference between the two lines.
The image below shows how the indicator appears on a chart:
The MACD indicator is made up of three separate elements, these appear together and are normally found underneath the price chart on most trading software.
They are –
Let us now look at each of these three signals in a bit more detail.
In the context of the MACD (Moving Average Convergence Divergence) indicator, a histogram is a visual representation that shows the difference between the MACD line and its signal line. It is typically displayed as a series of bars on a chart.
Here’s how it works:
Useless thing to know ->
The term “histogram” comes from a combination of two Greek words: “histos” meaning “anything set upright” (as the masts of a ship, the bar of a loom, or even a web of cloth), and “gram” meaning “drawing, record, or writing”. Essentially, the term translates to a “drawing of uprights”. In a histogram, each bar represents the frequency of occurrence by the area of the bar, with the height of the bar standing upright to show the size of the frequency or count, hence the appropriateness of the name.
Signal Line is Moving Average of Moving Average of the UnderLying!