The actual height of the bar is the difference between the MACD and signal line itself. The chart above shows what the Histogram represents. This creates a positive green bar that has a height equal to the difference of the two lines. This creates a negative green bar that has a height equal to the difference between the two lines. We can also see that when the Blue and Red lines cross, the histogram flips from one side to the other. So how can we read the histogram to generate trade signals?
We first want to track the histogram as it moves away from the zero line, in other words, track it as its bars grow larger. The actual signal comes when the histogram no longer gets larger and produces a smaller bar. We can see an example of this in the chart below: The Sell signal on the left was created by four growing bars in a row followed by a fifth bar that closed smaller.
This later signal would have missed a majority of the move that the Histogram signal would have caught. Therefore, using the histogram as a signal can earn us a greater number of pips. The Buy signal on the right is a similar story. We saw four bars growing consecutively until a 5 th bar was created that equaled the 4 th. We want to wait until a bar is smaller, so the trigger would have been presented after the 6 th bar closed.
Once we are in the trade, we can use sound Money Management to close out the trade appropriately. Interested in learning more about Forex trading and strategy development? Signup for a series of free guides, to help you get up to speed on a variety of trading topics!
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