Histogram

Histogram

What is a histogram?

A histogram is a graphical representation that organizes a group of data points into user-specified ranges. It looks like a bar graph. The histogram condenses a series of data into an easily interpretable visual by taking numerous data points and grouping them into logical ranges or bins.

Key points to remember

  • A histogram is a data bar graph representation that classifies a series of results in columns along the x-axis.
  • The y-axis represents the number or percentage of occurrences in the data in each column and can be used to view data distributions.
  • In trading, the MACD histogram is used by technical analysts to indicate changes in momentum.

Example histogram

Image of Julie Bang © Investopedia 2019

How Histograms Work

Histograms are commonly used in statistics to show how much of a certain type of variable occurs in a specific range. For example, a population-driven census of a country can use a histogram to show how many people are between 0 and 10, 11 and 20, 21 and 30, 31 and 40, 41 and 50, etc. This histogram would look like the example above.

Many traders are aware of the MACD (moving average convergence divergence) histogram, which is a popular technical indicator that illustrates the difference between the MACD line and the signal line.

For example, if there is a difference of $ 5 between the two lines, the MACD histogram graphically represents this difference. The MACD histogram is plotted on a graph to allow the trader to easily determine the momentum of a specific security.

A histogram bar is positive when the MACD line is above the signal line and negative when the MACD line is below the signal line. An ascending MACD histogram indicates an increase in the upward momentum, while a decreasing histogram is used to signal the downward momentum.

Example of MACD histogram

Image illustrating the MACD histogram.

Negotiate with the MACD histogram

Traders often overlook the MACD histogram when using this indicator to make trading decisions. One weakness of using the MACD indicator in its traditional sense, when the MACD line crosses the signal line, is that the trading signal is lagging behind. Since the two lines are moving averages, they do not intersect before a price movement has already taken place. This means that traders are giving up some of this initial movement.

The MACD histogram solves this problem by generating earlier input signals. Traders can track the length of the histogram bars as they move away from the zero line. The indicator generates a trading signal when a histogram bar is shorter than the previous bar. Once the small histogram bar is finished, traders open a position in the downward direction of the histogram. Other technical indicators should be used in conjunction with the MACD histogram to increase the reliability of the signal. Traders must place a stop-loss order to close the transaction if the security price does not change as expected.

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