This is a guest post by Ahmad Hassam
A MACD Histogram is a bar chart. The slope of the MACD Histogram is very important. This is the best indicator that tells whether bears or bulls are controlling the market. An upward slopping histogram indicates that the bulls are getting stronger while a downward sloping histogram indicates that the bears are getting stronger.
The price trend whether up or down is likely to continue if it is in the same direction as the slope of the MACD Histogram. When the slope of the histogram and the price action are moving in opposite direction, it means that the trend is in jeopardy. As a rule, always try to trade in the direction of the slope of the histogram.
The best buy signals occur when the MACD Histogram is below the center line and the slope turns upward. In the same manner, the best sell signals are given when the MACD Histogram is above the center line and the slope turns downward indicating that the bulls have lost control.
Go short as soon as the histogram stops moving higher and instead moves down. Place the initial stop loss at the last minor high in the price action. If the prices continue to fall, move the stop loss to the highest price level for the last two bars. This should be a trailing stop.
Go long as soon as the MACD Histogram stops moving down and starts moving up. Place the initial stop loss at the last minor low in the price action. Replace this with a trailing stop when prices continue to rise with the stop placed at the lowest price level of the last two bars.
Signals from the slope of the MACD Histogram are more worthwhile on the weekly charts. Lower timeframes like the daily charts have too many up and down moves making them difficult to trade.
The longer the timeframe, the longer the move is likely to continue. Trading with the weekly charts will produce bigger moves as compared to trading with the daily charts. Plus the signals generated on the longer timeframes are much more reliable as compared to the shorter timeframes.
This is important. When the MACD Histogram reaches a new low and there is a new low in the price action, this tends to confirm that the prices will continue to fall. Similarly when there is a new high on the MACD Histogram that is confirmed by a new high in the price action, prices will continue to rise.
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