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(Video) Top 3 Technical Tools Part 3: MACD
Enhance your trading confidence with a 2-minute lesson on how to combine Moving Average Convergence Divergence with other technical tools.

By Jill Noble
Mon, 04 Mar 2013 17:15:00 ET
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 "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 here>> and Part 2 on RSI here>> ). 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 Elliott Wave Junctures educational service (which empowers subscribers with information on nearly every aspect of trading. Try it risk-free for 30-days>> ).


 
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 lesson concludes our 3-part series on Jeffrey's practical lessons and proven techniques for supporting wave counts.
  
With more than 25 years of experience as a trader and technical analyst Jeffrey Kennedy is well-prepared to help subscribers identify trade setups in their own markets.
 
To watch and listen to more in-depth insights from Senior Analyst Jeffrey Kennedy across the markets you trade, learn how to subscribe to Elliott Wave Junctures now, risk-free >>
 
Get INSTANTaccess to an archive of lessons that includes in-depth guidance and insight on the Elliott Wave Principle and every aspect of technical trading.

3 to 5 video-based trading lessons each week will help you master the many critical aspects of spotting -- and acting on  -- high-confidence trading opportunities. Learn more >>  

 


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