How does one interpret the MACD histogram?

The MACD histogram is a crucial tool in technical analysis that specifically illustrates the difference between the MACD line (which is the difference between the 12-day and 26-day exponential moving averages) and the signal line (which is usually a 9-day exponential moving average of the MACD line). By calculating this difference, the histogram helps traders visualize the momentum of price movements.

When the histogram is above zero, it indicates that the MACD line is above the signal line, suggesting bullish momentum as the shorter-term average is outperforming the longer-term average. Conversely, when the histogram is below zero, it indicates bearish momentum, as the MACD line is below the signal line. The height of the histogram bars can also provide insight into the strength of the momentum; larger bars indicate stronger momentum, while smaller bars may suggest weakening momentum.

Understanding the MACD histogram allows traders to gauge potential buy or sell signals based on shifts in momentum and identify changes that may predict price movements. This focus on the relationship between the two lines and their respective distances leads to actionable insights regarding market trends and reversals.