Types of MACD Strategies

Histogram

The MACD histogram can be a useful tool for some traders. While we’ve explained a little bit above about how to read it, here’s how it works. It plots out the difference between the fast MACD line and the signal line. Traders can use the MACD histogram as a momentum indicator to jump ahead of changes in market sentiment.

There are three different elements involved with the histogram, which is mapped out around a baseline:

• The MACD line (produced by subtracting a long-term EMA from a shorter-term EMA)
• The signal line (produced by subtracting the two EMAs and creating a nine-day moving average)
• The histogram (produced by subtracting the MACD line from the signal line)

Keep in mind, though, that the MACD histogram has its faults (see the “Drawbacks” section below). Many traders often use other tools and techniques to determine and make their moves based on market sentiment, such as the trading volume of a given security.

Crossover Strategy

A crossover occurs when the signal and MACD line cross each other. The MACD generates a bullish signal when it moves above its own nine-day EMA and triggers a sell signal (bearish) when it moves below its nine-day EMA.

Zero-Cross Strategy

When the MACD crosses from below to above the zero line, it is considered a bullish signal. Traders generally take long positions when this occurs. If it crosses from above to below the zero line, it is considered a bearish signal by traders. Traders then enter short positions to take advantage of falling prices and increasing downward momentum.

In both cases, the longer the histogram bars, the stronger the signal. When there is a strong signal, it is more likely—but not guaranteed—that the price will continue in the trending direction.

Money Flow Index

The money flow index allows traders to use price and trading volume to identify and determine when assets are overbought or oversold in the market. This oscillator moves between 0 and 100 where readings below 20 are oversold and 80 are considered overbought.

One of the drawbacks of this strategy, though, is that it tends to produce fewer signals. That’s because the readings it produces are extreme due to the fact that they are focused on spurts in volume and prices.

Relative Vigor Index (RVI)

The relative vigor index (RVI) is a commonly used momentum indicator in technical analysis. It measures how strong a trend is by comparing the trading range of a certain security with its closing price. The comparison is made by using a simple moving average (SMA) to smooth the results out.

Traders generally believe that the value of the RVI increases as a bullish trend continues to gain momentum. That’s because, in this case, an asset’s closing price tends to fall at the higher end of the range. The opening price, on the other hand, stays further down on the lower end of the range.