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What Is a Histogram?
Let me tell you directly: a histogram is a graphical way to show how data is distributed, focusing on the frequency of numerical values within certain intervals. It takes a bunch of data points and groups them into ranges or bins, creating a visual that's easy to understand, much like a bar graph.
Key Takeaways
You should know that a histogram uses bars to bucket data ranges along the x-axis, with the y-axis showing counts or percentages for each bar. These bars help you spot patterns in how data is distributed. In trading, the MACD histogram signals momentum shifts, often giving buy or sell cues before the main MACD lines do.
How Histograms Work
Histograms are a staple in statistics for showing how often certain values appear in a range. For instance, if you're looking at a town's demographics, a histogram might display how many people fall into age groups like 0-10, 11-20, and so on up to 71-80. Imagine the y-axis marking thousands of people; starting from the left, you'd see about 500 in the youngest group, 4,000 in the next, and it continues from there.
You can customize histograms as needed. Change the bin intervals—our example uses eight bins of 10 years each, but you could switch to four bins of 20 years. Or redefine the y-axis to show percentages or densities instead of raw frequencies.
Histograms vs. Bar Charts
People often mix up histograms and bar charts since both use columns for visuals, but there's a clear difference. A histogram shows the frequency distribution of continuous variables in a dataset, while a bar chart compares discrete or categorical items.
How to Make a Histogram
If you want to create one, use Microsoft Excel's Histogram tool under the Statistical icon—it's straightforward. Alternatively, do it manually: calculate frequencies for each time span, put them in a table with equal intervals, plot frequencies on the y-axis and intervals on the x-axis, then draw bars for each based on those frequencies.
Histogram Example: The MACD Histogram
Technical traders, pay attention: the MACD histogram shows the gap between the MACD line and the signal line. If there's a $5 difference, it's plotted as a bar, helping you gauge a security's momentum. Positive bars mean the MACD is above the signal, indicating upward momentum when increasing; negative bars signal the opposite for downward trends.
Trading With the MACD Histogram
One issue with just the MACD and signal lines is their lag—they don't cross until after a price move has started, so you miss part of it. That's where the histogram helps by providing earlier signals. Watch the bar lengths from the zero line; a shortening bar compared to the previous one might signal a trade in the direction of the decline. Always pair it with other indicators for reliability, and use stop-loss orders if the price doesn't go your way.
What Is a Histogram in Simple Terms?
Simply put, a histogram is a graph using rectangles to show how often numerical data appears. The height is the frequency, and the width represents the variable's value range, like time or age.
What Is a Histogram vs. a Bar Graph?
A histogram is two-dimensional with varying heights and widths meaning specific things for data distribution. A bar graph is one-dimensional, with bar heights mattering but widths not, and usually gaps between bars—unlike the continuous columns in histograms.
When Should a Histogram Be Used?
Use a histogram whenever you need to compare distributions of numerical data across intervals. It quickly reveals patterns in large datasets, aiding decision-making in business or organizational contexts.
The Bottom Line
In essence, a histogram organizes data points into ranges for clear insights. Traders use the MACD version to spot momentum changes, and it's valuable for decision processes across departments. Try making one in Excel if you're interested. Remember, this is for informational purposes—check our disclaimer for details.
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