“Guessing or going by gut instinct won’t work over the long run. If
you don’t have a defined trading methodology, then you don’t have a way
to know what constitutes a buy or sell signal. Moreover, you can’t even
consistently correctly identify the trend.”-Jeffrey Kennedy
Jeffrey Kennedy is an accomplished teacher and a Senior Analyst here at EWI.
Yet he often says that the Wave Principle alone is not a trading methodology.
It does not tell you how much trading capital you can afford to risk, or specific
guidance about which entry or exit levels are best suited for your trading
style or where to set your protective stop.
Kennedy also says that along with risk management and emotional discipline,
the right technical tools are a vitally important part of supporting your wave
count.
To enhance trading confidence, Jeffrey’s 3 favorite technical tools are Japanese
candlesticks, RSI, and MACD. (read Part
1 on Japanese Candlesticks and Part
2 on RSI ). Today’s lesson shows you how MACD can help identify trading
opportunities with an example from USDCAD.
This 2-minute video and overview of MACD are adapted from Jeffrey’s Trader’s
Classroom educational service (which empowers subscribers with information
on nearly every aspect of trading).
More from Jeffrey:
Moving average convergence divergence (MACD) is a momentum indicator
developed by Gerald Appel. It consists of two exponential moving averages,
the MACD line and Signal line. The difference between these two lines yields
an additional indicator, MACD Histogram.Since these studies evaluate momentum, they work optimally in trending
markets. When combined with reversal candlestick patterns, MACD and MACD
Histogram can increase confidence in these patterns as well as continuation
of the larger trend.MACD divergence occurs when prices move one way and MACD moves the
other. Bearish divergence forms when prices make new highs and MACD does
not. Conversely, new price lows without lower MACD readings is bullish
divergence. These conditions aid traders in identifying potential changes
in momentum and trend.MACD is constructed using two lines referred to as the MACD line and
the Signal line.When the MACD line appears to penetrate the Signal line, but fails
to do so, a hook forms. The significance of a hook is that it coincides
with countertrend price moves.MACD is excellent technical tool provided you know how to use it and
what to look for.
This article
was syndicated by Elliott Wave International and was originally published
under the headline (Video Lesson) Top 3 Technical Tools Part 3: MACD. EWI is the world’s largest market forecasting
firm. Its staff of full-time analysts led by Chartered Market Technician
Robert Prechter provides 24-hour-a-day market analysis to institutional
and private investors around the world.