Three MACD trading strategies

Histogram reversal

The histogram is arguably the most useful part of the MACD, with the bars representing the difference between the MACD and signal lines. This means that as the histogram moves further away from the zero line, the two lines are moving further apart. However, once that expansion phase is over and you begin to see a hump shape emerge, it's a signal that the moving averages are tightening and is therefore an early sign that a cross is impending. This is a leading indicator, rather than the lagging nature of the crossover strategy, mentioned above.

The chart below highlights the potential to utilise the MACD histogram as a trading tool. By awaiting two counter-trend moves in the histogram, it mitigates the chance that such a move will be a one-off rather than a reversal. By utilising the tool in the direction of the trend, the chart below highlights three profitable trades and one loser. A trader can also use the tool for exiting the trade, with positions exited once the MACD starts to reverse into the opposite direction.

Zero cross

This is often seen as the slowest signal of the three, with a trade taken when the MACD line moves up through or below the zero level. This signal takes longer to form, meaning you will typically see fewer signals, but also fewer false reversals.

That being said, this method should be used carefully, as the delayed nature means that short, choppy markets would often see the signals issued too late. However, as a tool for providing reversal signals of long sweeping moves, this can be very useful.

The chart below highlights the past three signals on AUD/USD, with the indicator about to issue a fourth. Each of these would have proved profitable, with a number of false signals averted by not following the MACD cross method. It is crucial to understand where to get out, and this market provides a number of trendline breaks, which would have signaled a good time to exit the trade. Alternatively, use the break below the previous swing low (uptrend) or above the prior swing high (downtrend) to exit the trade.