Introduction to the MACD Colored Histogram Indicator
The classic MACD, which means Moving Average Convergence and Divergence, is one of the most widely used technical indicator. In fact, many seasoned profitable traders use the MACD as their main oscillator.
The MACD Colored Histogram Indicator is a modified version of the classic MACD Indicator developed for the purpose of clearly showing users where price might reverse or resume momentum.
What is the MACD Colored Histogram Indicator?
This version of the MACD plots MACD histogram bars that change colors to indicate trend and momentum direction. It plots lime MACD bars to indicate a bullish momentum and trend, and red MACD bars to indicate a bearish momentum and trend. It also plots gray MACD bars to indicate a reversal coming from either an overbought price level or an oversold price level.
How the MACD Colored Histogram Indicator Works?
The MACD Colored Histogram Indicator computes for the difference between two underlying Exponential Moving Average (EMA) lines. It then plots the difference as the MACD bars.
It also computes for the Simple Moving Average (SMA) derived from the MACD bars, which is then plotted as the signal line.
This indicator plots lime bars whenever the MACD bars are positive and above the signal line. It also plots red bars whenever the MACD bars are negative and below the signal line. It plots gray bars either when the MACD bars are positive but below the signal line or negative but above the signal line.
How to use the MACD Colored Histogram Indicator for MT4
This indicator has three variables which can be used to modify the sensitivity of the MACD.
The “fast_ema_period” and “slow_ema_period” variables refer to the number of bars used for the two underlying EMA lines used to compute for the MACD bars.
The “signal_period” refers to the number of periods used to compute for the signal line derived from the MACD bars.
This indicator can be used to identify trend direction based on whether the MACD bars are generally positive or negative.
It can also be used to confirm the resumption of momentum using the lime and red bars as a signal.
It can also be used to spot reversals based on the changing of the color of the bars to gray.
As an oscillator, this indicator can also be used to spot reversals based on divergences.
Buy Trade Setup
When to Enter?
Open a buy order on the confluence of a bullish divergence and red MACD bars crossing above the signal line changing to gray. Set the stop loss on the support below the entry candle.
When to Exit?
Close the trade as soon as the MACD bars cross back below the signal line.
Sell Trade Setup
When to Enter?
Open a sell order on the confluence of a bearish divergence and lime MACD bars crossing below the signal line changing to gray. Set the stop loss on the resistance above the entry candle.
When to Exit?
Close the trade as soon as the MACD bars cross back above the signal line.
Conclusion
This version of the MACD is very much similar to the classic MACD. However, it does allow users to spot reversals in trend and momentum easier because of the changing of the color of the MACD bars. Just as with the classic MACD, it can be a reliable trend and momentum indicator, as well as a reversal indicator, but it works best when traded in confluence with other technical analysis indications.
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MACD Colored Histogram Indicator for MT4
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