MACD Histogram Reversal Strategy

Moving Average Convergence/Divergence Histogram Reversal Strategy – Introduction

In the MACD Histogram Reversal Trading Strategy we use the MACD Momentum indicator as a tool for trend and trend reversal detection. Thereby we try to detect a trend reversal shortly before its emergence and open a position in the direction of the presumably emerging trend.

At a glance – MACD Histogram Reversal Strategy for Crypto

Time needed: 14 Minuten.

The 4 steps of the MACD Reversal strategy explained:

  1. Display MACD

    Display the MACD indicator on your stock exchange or in a tool like TradingView.Show MACD Indicator for Histogram Reversal Strategy

  2. Recognize the trend

    The next step is to watch the MACD and wait for the confirmation of a trend and an incipient trend reversal.

  3. Open a position

    If you are close to or at the beginning of a trend reversal, open a position and bet with the developing trend. Do not forget to set a stop-loss order! In the picture you can see possible entries at the beginning of a trend reversal.Entry points in the small image for the HowTo

  4. Take profit

    If your position is in profit, you can realize your profit with the help of a trailing stop order or by moving your regular stop-loss order. Alternatively, you can always close your position manually.

MACD Trading Strategy – What does the MACD tell us?

The Moving Average Convergence/Divergence is an indicator based on two moving averages and a histogram. The two lines of the indicator are EMAs (Exponential Moving Average) similar to a moving average. The advantage of the EMAs is that they react faster than the normal MAs or SMAs.

If the two moving averages come closer together, they are referred to as converging; if they move away from each other, they are referred to as diverging. Hence the name Moving Average Convergence/Divergence. The MACD histogram represents the difference between the two MAs. If the MACD is above its zero line, it indicates an upward trend. If it is below its zero line, it indicates a downward trend.

How to trade the Histogram Reversal strategy with the MACD

In the Histogram Reversal Trading Strategy we use probably the most valuable instrument of the MACD: the histogram. The big advantage of this strategy over the MACD Crossover Trading Strategy is that it is a leading strategy. Here we use already known trends for placing our position. So we can bet on a price movement up or down before it actually happens.

Step 1: Display MACD indicator

Show MACD Indicator for Histogram Reversal Strategy
Show MACD indicator on an exchange

Display the MACD indicator on your exchange or in a tool like TradingView. For this you will usually find a menu item labeled “Indicators”. Open the menu item on the price chart and enter “MACD” in the search box.

Step 2: Identify the current trend

Next, it is important to recognize the current trend. Only when we recognize the current trend, we can wait for a signal to reverse the trend – the reversal – and then react before the actual market movement and open our position.

Detect trend with MACD
Trend detection with MACD

In the image above you can see a price chart with usual price candles as well as the volume on top and the MACD indicator on the bottom. On the screenshot, we first see (from left to right) an uptrend where the histogram is green and the blue MACD line is above the red signal line. This uptrend then turns into a downtrend with a MACD line below and a red histogram. After the end of this red histogram would have been a perfect example of a trend reversal into an uptrend.

Step 3: Detect reversals and open position

Entry points for the MACD strategy
Entry Points for the MACD Histogram Reversal Strategy

If you recognize a trend reversal as described in the previous step, you have found your entry point. In the picture above 3 entry points are marked. The first marker describes a good entry point for short, the second and third a good entry point for long. At the second marking you see that a good entry position does not have to mean that the trend will be held for a long time. Therefore, it is important that you set a stop-loss order immediately after setting the position and thus protect your position against excessive losses. If your position is in profit, but the current trend continues to move in the right direction, pull your stop-loss into profit as soon as possible.

Step 4: Realize profits

There are three simple strategies for realizing profits:

  • Trend reversal detection: Take your profit by closing your position as soon as another trend reversal in the other direction is announced. If you trade only by MACD, this could be the strategy with the highest profit margin.
  • Additional trailing stop: Set a so-called trailing stop order. A trailing stop moves with the price as it rises. If you set it sufficiently close to the current price, once you are satisfied with the profit, you may still be able to pocket a percent or two before the trailing stop is triggered and your position is closed.
  • Simple stop-loss: keep dragging your stop-loss order along the price in profit. This way you can adjust the distance of the stop loss according to your feeling and price movement and let your experience and intuition work for you.
TP StrategyExecutionDescription
Reveral detectionOn signal changeSrategy with the highest possible profit
Trailing stopAutomated after postEasy and safe with potential for good profits
Simple stop lossManualProfits are based on experience of trader
Take profit srategies for the MACD historgram reversal trading

Simply decide on the strategy that suits you best or test all three strategies with smaller sums. If you still have questions about stop-loss or trailing stop, you will surely find what you are looking for in our instructions.Simply decide on the strategy that suits you best or test all three strategies with smaller sums. If you still have questions about stop-loss or trailing stop, you will surely find what you are looking for in our instructions.

We wish you good luck with your trading and are always happy to receive criticism and suggestions in the comments section!

Frequently Asked Questions and Answers about the MACD Histogram Reversal Strategy

How does the MACD indicator work?

The Moving Average Convergence/Divergence calculates the difference (the difference) between two EMAs (Exponential Moving Average). This difference is displayed as a line. Based on this main line and a signal line, a histogram is created, which is interpreted and used for trend prediction and trend confirmation.

What does the MACD tell us?

The MACD is usually interpreted in three different ways: 1) Trend confirmation: A rising MACD confirms an uptrend of the asset, a falling one a downtrend. 2) Crosses: If the MACD line (usually blue) crosses the signal line from the bottom to the top, this can be interpreted as a buy signal. The opposite case would mean a sell signal. 3) If the upward or downward trend of an asset is not confirmed by the MACD (by the histogram) a so-called divergence is present, which speaks for a soon to change price trend (price in the other direction).

How is MACD calculated?

The Moving Average Convergence/Divergence indicator is calculated from two EMAs. The MACD describes the difference between the fast and slow EMA (Exponential Moving Average).

Important risk notice:
This service or the provider advertised here is only suitable for professional traders. Users without sufficient experience usually suffer a total losswhile trading here. Trading with leverage is highly risky and leads to poor risk management. Use this service only as a professional trader with sufficient experience in trading and leverage.

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