Enhance your trading confidence with this short lesson on how to combine Moving Average Convergence Divergence with other technical tools.

By Elliott Wave International

“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.

Get more trading lessons from EWI’s Jeffrey Kennedy: Announcing Trader Education Week Join us for a FREE trading event that will teach you how to spot trading opportunities in your charts. Spend this week getting free trading lessons that you can apply to your trading immediately — from one of the world’s foremost market technicians, Jeffrey Kennedy. Whether you are new to trading or have years of experience, you’ll benefit from Jeffrey’s easy-to-understand style and clear presentation. He’ll cover topics such as: Patterns that lead to high-confidence trade setups Momentum indicators to support your pattern analysis Japanese candlestick patterns that alert you to a change of trend How to manage your trades using protective stops Register now for your FREE week of trading lessons