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Crossover

The MACD line and signal line can be utilized in much the same manner as a stochastic oscillator, with the crossover between the two lines providing buy and sell signals. As with most crossover strategies, a buy signal comes when the shorter-term, more reactive line – in this case the MACD line – crosses above the slower line – the signal line. Conversely, when the MACD line crosses below the signal line it provides a bearish sell signal.

As the crossover strategy is lagging by nature, it is based on waiting for a movement to occur before opening a position. The main issue faced by the MACD in weaker market trends, is that by the time a signal is generated, the price may be reaching a reversal point. This would then be considered a ‘false signal’. It is worth noting that strategies which utilise price action for confirmation of a signal are often seen as more reliable.

The chart below highlights this standard crossover strategy.

Histogram Reversal

The histogram is arguably the most useful part of MACD, with the bars representing the difference between the MACD and signal lines. When the market price is moving strongly in a direction, the histogram will increase in height, and when the histogram shrinks, it is a sign the market is moving slower.

This means that as the bars on the histogram move further away from zero, the two moving average lines are moving further apart. Once the initial expansion phase is over, a hump shape will likely emerge – this is a signal that the moving averages are tightening again, which can be an early sign that a crossover is impending.

This is a leading strategy, in contrast to the lagging crossover strategy mentioned above. The histogram reversal is based on using known trends