Can’t miss a top when you see the head and shoulders in place! See examples of a head-and-shoulders pattern in a chart of SPY
By Elliott Wave International
A head-and-shoulders pattern is one of the most well-known classic chart patterns. In this 4-minute video from Jeffrey Kennedy’s Trader’s Classroom, you’ll see an example of a bearish head-and-shoulders formation and a bullish, inverted head-and-shoulders pattern in the chart of SPY, the ETF that tracks the S&P 500. You’ll also learn how to calculate the minimum expected target for the pattern.
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In this free report, you will learn some of the most effective tools of the trade from analysts at Elliott Wave International. Find out which technical indicators are best for analyzing chart patterns, which are best for anticipating price action, even which are best for spotting high-confidence trade setups — plus how they all complement Elliott wave analysis.
This article was syndicated by Elliott Wave International and was originally published under the headline Learn to Recognize a Popular Old School Chart Pattern. 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.
Monetary “Yentervention” did not cause the currency’s depreciation — it only COINCIDED with it
Talk about “star” wars.
“Asia’s biggest action star” Donnie Yen was just cast in the next installment of the never-ending Star Wars movie franchise. Mr. Yen, in case you aren’t aware, is known as “the strongest man in the entire universe.” (Huffington Post)
It wasn’t that long ago you could say a similar thing about the Japanese yen. Count three years back, to 2012, and the yen looked like the strongest monetary unit in the financial universe, standing at an all-time record high against the mighty U.S. dollar, the world’s “reserve” currency.
Flash ahead to now (circa September 2015), and the yen is down 30% whilst clinging to its lowest level against the dollar in 12 years.
So, what changed?
Well, that depends on whom you ask. According to the mainstream pundits, one main “force” has drained the yen of its superstar status: the almighty “Light S-ABE-R.” Or, in non-geek terms, Japan’s Prime Minister Shinzo Abe, who’s been shaping the country’s monetary policy. See:
And: “Japan Bulls Rest Hopes for Yen Weakening on Abenomics” (Bloomberg)
There’s just one flaw in that logic:
The yen’s record-shattering bull run ended in late 2011 — more than a year before Abe took office in January 2013!
What’s more, Abe did not implement his “three arrows of fiscal stimulus, quantitative easing, and deregulation” — the factors widely held “responsible” for the yen’s weakness — until later in his term as Japan’s Prime Minister.
Now, let’s go back to the very beginning, to late 2011, and examine the yen’s broader trend through the lens of Elliott wave analysis. Here, we come to our November 2011 Global Market Perspective (GMP), where our Senior Currency Strategist, Jim Martens, identified a historic, decades-long Elliott wave “ending diagonal” pattern on the yen’s price chart.
As its name implies, an ending diagonal is found at the termination points of larger wave patterns, indicating exhaustion of the larger trend. When an ending diagonal … well, ends, the prices reverse and carry to the pattern’s origin — or even further.
The terminal nature of ending diagonals fortified the November 2011 Global Market Perspective’s bearish yen/bullish U.S. dollar forecast:
“USDJPY has been falling since June 2007 in a thrust from a [4th-wave] triangle that would end an impulsive decline lasting at least 40 years. The thrust [lower] has been unfolding as an ending diagonal, and as such, an abrupt turn [higher — towards weaker yen and stronger dollar –] should come as no surprise.”
The rally indeed took off the 2011 low, yet took a while to warm up. But, by January 2013 — coinciding with Prime Minister’s Abe taking the office — Global Market Perspective confirmed a long-term reversal was now underway:
“The recent advance in USDJPY since September  is typical of third waves. There will undoubtedly be pauses along the way but next year or so [i.e., in 2014] should easily see USDJPY in the 124.16 area.”
This final chart captures the full extent of the USDJPY’s three-year long, 30%-plus uptrend:
Bottom line: Abe’s monetary “Yentervention” did not cause the yen’s depreciation; it coincided with a terminating Elliott wave ending diagonal pattern on the USDJPY’s price chart, which called for an upward reversal (towards weaker yen and stronger dollar).
You’ve just seen how invaluable Elliott wave analysis can be in clarifying long-term trend changes before they occur — and regardless of the political and economic factors.
Now, you can see how equally useful our technical analysis model is in anticipating near-term trend changes in EURUSD, Chinese yuan, and more — 100% FREE!
Right now, our free-membership Club EWI is featuring an exclusive new interview with EWI’s Senior Currency Strategist, Jim Martens.
In this compelling one-on-one ElliottWaveTV interview, Jim walks you through multiple labeled price charts of the world’s leading currency pairs — including the USDJPY.
You’ll watch Jim focus on the recent USDJPY “nosedive” towards a stronger yen and give you specific price levels which, if breached, would tell you if the yen is to get even stronger.
So, here’s what you need to know:
This 6-minute Club EWI interview with Jim Martens is absolutely FREE to all Club members
Besides USDJPY, Jim also shows you the “exciting” road ahead in the EURUSD and China’s yuan.
This article was syndicated by Elliott Wave International and was originally published under the headline Why the Japanese Yen’s Bull Run REALLY Ended. 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.
Here below, you can read an exclusive excerpt from Chapter 1:
Chapter 1: A Useful Trading Methodology
Of the many ways the Wave Principle can improve trading success, for me, points 1, 2, and 6 are the most important. I like to trade with the trend, and the Wave Principle allows me to identify that trend…
The setup waves — the waves we’re trying to identify in order to prepare for the trading opportunities — are wave (2), wave (4), and wave (B)…
Let’s concentrate on trading wave (3), since it is usually the strongest and longest wave, and its trend is clear. That means that we want to identify the wave (2) that will lead into a strong third wave.
Now, let’s jump off the page and into the real world where you can see exactly how Jim used this one simple lesson to identify a major turning point in euro/dollar (EURUSD).
The time was mid-2014. The euro was orbiting a 2-and-1/2 year high against the U.S. dollar. But, as early as mid-May, Elliott wave patterns already showed cracks in the euro’s bullish case. And on June 27, Jim recorded an urgent video for his Currency Pro Service subscribers in which he warned the buck’s luck was about to change.
You can listen to a clip from Jim’s June 27, 2014 Currency Pro Service video right here. Note the basis for Jim’s dramatic forecast — an imminent third wave.
Soon after, the EURUSD followed its Elliott wave script. The third wave initiated the market’s largest annual decline since 2005 and pushed the U.S. dollar to its highest level in 12 years.
Riding forex “bike” isn’t easy. But right now, you can utilize the “training wheels” of Jim Martens’ enduring classic “How to Use the Wave Principle to Boost Your Forex Success” — free. With 14-pages of original analysis, detailed charts, and timeless trading examples, this report is a must-have for every serious trader in not just currencies, but every single financial market.
The best part is, the entire report is available at the incredible discount price of $0.00! Yes, you read that right. Jim’s “How to Use the Wave Principle to Boost Your Forex Success” is ready to view as soon as you become a free Club EWI member, a 325,000 member-strong online community of your fellow Elliott wave fans.
If you’re already a Club EWI member, click here to instantly download your copy of Jim Martens’ “How to Use the Wave Principle to Boost Your Forex Success” (.pdf)
This article was syndicated by Elliott Wave International and was originally published under the headline The U.S. Dollar’s 2014-2015 Rally: Wave 3 in Action. 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.
The following trading lesson has been adapted from Jeffrey Kennedy’s eBook, Trading the Line — 5 Ways You Can Use Trendlines to Improve Your Trading Decisions. You can download the 14-page eBook here.
“How to draw a trendline” is one of the first things people learn when they study technical analysis. Typically, they quickly move on to more advanced topics and too often discard this simplest of all technical tools.
Yet you’d be amazed at the value a simple line can offer when you analyze a market. As Jeffrey Kennedy, editor of Trader’s Classroom service, puts it:
“A trendline represents the psychology of the market, specifically, the psychology between the bulls and the bears. If the trendline slopes upward, the bulls are in control. If the trendline slopes downward, the bears are in control. Moreover, the actual angle or slope of a trendline can determine whether or not the market is extremely optimistic or extremely pessimistic.”
In other words, a trendline can help you identify the market’s trend. Consider this example in the price chart of Google.
That one trendline — drawn between the lows in 2004 and the lows in 2005 — provided support for a number of retracements over the next two years.
That’s pretty basic. But there are many more ways to draw trendlines. When a market is in a correction, you can draw a trendline and then draw a parallel line: in turn, these two parallel lines can create a channel that often “contains” the corrective price action. When price breaks out of this channel, there’s a good chance the correction is over and the main trend has resumed. Here’s an example in a chart of Soybeans. Notice how the upper trendline provided support for the subsequent move.
For more free trading lessons on trendlines, download Jeffrey Kennedy’s free 14-page eBook, Trading the Line — 5 Ways You Can Use Trendlines to Improve Your Trading Decisions. It explains the power of simple trendlines, how to draw them, and how to determine when the trend has actually changed. Download your free eBook.
What is a moving average? Here’s how EWI’s Jeffrey Kennedy puts it:
A moving average is simply the average value of data over a specified time period, and it is used to figure out whether the price of a stock or commodity is trending up or down.
The moving average is a technical indicator which has stood the test of time. It’s been 27 years since Robert Prechter described this vital tool in his famous essay, “What a Trader Really Needs to be Successful.” What he said then remains true today:
A simple 10-day moving average of the daily advance-decline net, probably the first indicator a stock market technician learns, can be used as a trading tool, if objectively defined rules are created for its use.
He also says that you can think of a moving average as an automated trend line.
A 20-year veteran of technical analysis, Jeffrey wrote “How You Can Find High-Probability Trading Opportunities Using Moving Averages.”
[Descriptions of the following charts are summaries from that eBook]:
Let’s begin with the most commonly-used moving averages among market technicians: the 50- and 200-day simple moving averages. These two trend lines often serve as areas of resistance or support.
For example, the chart below shows the circled areas where the 200-period SMA provided resistance in an April-to-May, 2008 upward move in the DJIA (top circle on the heavy black line), and the 50-period SMA provided support (lower circle on the blue line).
Let’s look at another widely used simple moving average which works equally well in commodities, currencies, and stocks: the 13-period SMA.
In the sugar chart below, prices crossed the line (marked by the short, red vertical line), and that cross led to a substantial rally. This chart also shows a whipsaw in the market, which is circled.
Another popular moving average setting that many people work with is the 13- and the 26-period moving averages in tandem.
The chart of Johnson and Johnson shows a crossover system using a 13-week and a 26-week simple moving average of the close. Obviously, the number 26 is two times 13. During this four-year period, the range in this stock was a little over $20.00, which is not much price appreciation. This dual moving average system worked well in a relatively bad market by identifying a number of buy-side and sell-side trading opportunities.
You can read the first two chapters of this eBook FREE for a limited time.
The first two chapters reveal:
The Dual Moving Average Cross-Over System
Moving Average Price Channel System
Combining the Crossover and Price Channel Techniques
Jeffrey’s insights are all about helping you become a better trader.
Remember, the first two eBook chapters are FREE, so take advantage of this limited-time offer.
Fibonacci is commonly used to estimate supports and resistence levels in stock prices. Here we will not get into why it works. But we will simply observe how it could have helped you in the latest Gold crash.
If you use Elliott Waves in your technical analysis, you may already use Fibonacci ratios to determine targets and retracement levels in your charts.
But have you heard of “Fibonacci Clusters?” Here is an example from the recent Gold market action:
Performing multiple Fibonacci calculations of a price move often yields concentrations of Fibonacci levels, which act as barriers to price moves.
How do you create a Fibonacci Cluster of support or resistance?
In the following chart, you can see how to draw a line from the most recent swing high to the relevant low and then connect previous higher highs to the same pivotal low. In the rectangular box, notice where the advance in GCA reversed from a cluster:
Kennedy covers other examples to explain how slingshots, reverse divergence and positive/negative reversals highlight the same momentum signature:
A bullish slingshot forms when prices make higher lows while underlying momentum surpasses previous extremes. Conversely, a bearish slingshot occurs when prices make lower highs while momentum exceeds prior readings.
In subsequent days, Gold prices fell to below $1550.
Learn How You Can Use Fibonacci to Improve Your Trading
If you’d like to learn more about Fibonacci and how to apply it to your trading strategy, download this 14-page free eBook, How You Can Use Fibonacci to Improve Your Trading.
EWI Senior Tutorial Instructor Wayne Gorman explains:
The Golden Spiral, the Golden Ratio, and the Golden Section
How to use Fibonacci Ratios/Multiples in forecasting
How to identify market targets and turning points in the markets you trade
Explore the rules, guidelines and Fibonacci multiples of impulse waves
Impulse waves are an integral part of the Wave Principle. Understanding their rules, guidelines and Fibonacci multiples will improve your application and your ability to identify high-confidence trade setups.
There are three rules that govern impulse waves:
wave two may never retrace more than 100% of wave one;
wave three may never be the shortest impulse wave of waves one, three and five. It does not have to be the longest, but it may never be the shortest; and
wave four may never end in the price territory of wave one.
Fibonacci multiples are the mathematical basis used to identify wave objectives. For example, we often tend to see a deep retracement in wave two. A .618 multiple of wave one and .382 multiple of wave three are the most common Fibonacci retracements for second and fourth waves. Fibonacci extensions for waves three and five include .618, 1.000, 1.618, 2.000 and 2.618.
For example in this 120-minute price chart of GE, we have an initial move to the downside. Notice the deep retracement in wave 2 – we go back to beyond the .618 retracement at 22.89.
From there, we see a wave three decline followed by a fourth wave bounce — a correction — back to the .382 retracement of wave three at 21.78.
The most common Fibonacci retracement for a fourth wave is a .382 multiple of wave three.
The most common Fibonacci retracement for a second wave is a .618 multiple of wave one.
You may notice another extension, or multiple, on this price chart coming in at 21.06. At that level, wave three equals a 2.618 multiple of wave one.
Within the structures of an impulse wave (or in corrections, for that matter), each wave of the pattern is going to have some type of Fibonacci multiple or ratio to prior waves within the structure.
One of the most relevant guidelines pertaining to impulse waves is that when an impulse wave completes, a correction occurs that pushes prices back into the span of travel of the previous fourth wave (most often ending near its terminus).
If we apply this to GE, you can see how it works:
When we finished the 5 wave decline, it set the stage for a countertrend move back up to the previous 4th wave extreme.
Learn How the Wave Principle Can Improve Your Trading
Get FREE access to Jeffrey Kennedy’s tutorial, How the Wave Principle Can Improve Your Trading. You’ll learn 5 benefits of wave analysis and how you can apply them in your trades. It’s straightforward, practical, and highly applicable. Plus get a FREE bonus lesson on setting protective stops in your trades!
Tips from EWI Senior Analyst Jeffrey Kennedy’s Stocks and Commodities interview
If you trade with Elliott wave analysis, your trading decisions are all about the difference between where the market is vs. where it will be. According to Jeffrey Kennedy, editor of our Elliott Wave Junctures service, risk management skills are vital to being a successful technical trader.
Here’s what Jeff had to say in a recent interview:
Risk management is all about consistency. It is all about longevity. It is like going back to the story about the tortoise and the hare. You want slow or small consistent profits…
Being an analyst and trader involves two totally separate skill sets. As an analyst, you are a master of observation. You are focusing on what could happen. As a trader, your primary focus is on what is happening. Regardless of whether you think the market’s about to top, if the trend is up, as a trader, you’ve got to play it. Divergence is a great example of what I am referring to.
As an analyst, if I am looking at a momentum tool, and I see divergence, well, that is suggestive of market weakness. As a trader I have to focus on what is happening, not what could happen.
If I see the daily trend is up, I have to buy the market. How do I resign myself to the fact that I have divergence, which means a decrease in momentum, a possible weakness, and a possible trend change? I have to focus on what is happening as a trader and the trend is up. How do I reconcile that?
This is where risk management comes into play. For example, you are allowed to play the buy side to the tune of $100,000. If you are seeing divergence begin to enter the market, you may say to yourself, “I have to trade the trend, and the trend is up, but because of this divergence, I am not going to go all in.” … [and] you have to have a very tight stop on the position.
… That is how risk management comes into play, and how you focus on what is happening and reconcile what is happening as a trader. But you also have to take into consideration what could happen when you are wearing your analytical hat and see that potential for divergence because there are markets I have seen where the divergence continues for six months. Analysts trade what could happen, whereas traders trade what is happening.
Effective risk management is indispensable to successful trading. Ultimately it doesn’t matter how accurately you spot divergence or label your waves if you risk too much on your trades.
Get 6 FREE Trading Lessons from Jeffrey Kennedy
Jeffrey Kennedy shares his 20 years of wisdom in analysis and trading — to help you decide when to act — in a new FREE report, 6 Lessons to Help You Find Trading Opportunities in Any Market.
This report includes 6 different lessons that you can apply to your charts immediately. Learn how to spot and act on trading opportunities in the markets you follow.
Here’s what Elliott wave analysis is all about: You study charts to find
non-overlapping 5-wave moves (trend-defining) from overlapping 3-wave ones
With that in mind, please take a look at this chart of the S&P 500, which
our U.S. Intraday Stocks Specialty Service (FreeWeek
is on now) posted for subscribers at 9:37 AM June 14:
Immediately, you can see that the S&P 500 has been moving sideways in a
choppy, overlapping manner. That’s the definition of a correction — i.e., that
is NOT the trend. The trend, as the U.S. Intraday Stocks Specialty
Service editor Tom Prindaville said in the morning market overview, was
higher — at least in the short-term:
…sideways-to-up over the very near term will be expected.
Simply put, overall higher near-term remains the intraday call
— to complete a corrective second wave.
And here’s a chart of the S&P 500 at the close of the market that the Service posted at 3:34 PM on the same day:
To make this bullish forecast, the Service editor Tom Prindaville
was simply following the Elliott wave model of market progression. The model
called for a completion of the developing wave 2 — in this case, “higher
Market corrections — the sideways, choppy moves you see in both charts above
— are notoriously hard to forecast. And not every Elliott wave forecast works
out. But you do get a real, practical roadmap
of the expected market action.
There were few “fundamental” reasons to be bullish on U.S. stocks on Friday
morning (June 15).
If anything, the news that the U.S. unemployment rose in 18 states in May
sounded downright bearish. But stocks rallied anyway — for a seemingly unlikely
reason, explained the pundits: Because all the bad news lately makes it likely
that the Fed will step in again.
(Just as a side note, how many times did the Fed “step in” in
2007-2009 while the DJIA was dropping from over 14,000 to below 6,500? But hey,
that’s ancient history, and besides — “it’s different this time,”
From an Elliott wave perspective, there was another reason for the June 15
rally: the S&P 500 had some unfinished technical business on the upside.
Here’s what the editor Tom Prindaville wrote on Friday morning in EWI’s U.S.
Intraday Stocks Specialty Service (try
it free now):
S&P 500 (Intraday) Posted On: Jun 15 2012
9:30AM ET / Jun 15 2012 1:30PM GMT Last Price:
Trade pushed beyond the 1319.74 level yesterday…[which] is significant
because it implies that, minimally, the S&P wants to take a closer, more
deliberate look at 1338, and the overall proportionally of the recent Elliott
wave action backs that up. For today, persistence atop 1319.74 is needed to see
the very near-term trend up with a minimum upside target of 1338.32.
The S&P 500 closed trading on June 15 at 1342.84, exceeding the bullish
price target U.S. Intraday Stocks Specialty Service gave on Friday
morning by 4 points.
Today we sit down with Elliott Wave International’s Futures Junctures Editor and Senior Tutorial Instructor Jeffrey Kennedy to discuss his favorite wave pattern of all: the diagonal.
EWI: You say if you had to pick just ONE of all 13 known Elliott wave structures to spend the rest of your technical trading life with, it would be the diagonal. First, tell us what the diagonal is.
Jeffrey Kennedy: The diagonal is a five-wave pattern labeled 1 through 5, in which each leg subdivides into three smaller waves: 3-3-3-3-3. Unlike impulse waves, however, diagonals are the only five-wave structures in the direction of the main trend in which wave 4 almost always moves into the price territory of wave 1. (See illustrations below.)
EWI: So, what makes this pattern so darn special?
JK: As you can see in the above charts, the diagonal is a terminating pattern. They can only occur in waves 5 of impulses or C-waves of corrections. This is why they’re so exciting. Diagonals precede a dramatic change in trend. And, when they end, prices tend to retrace the entire pattern, or more, and fast — in 1/3 to 1/2 the time it took the pattern to form.
Put simply: If you see a diagonal, you know the train of change is coming into the station.
EWI: Well, in your Daily Futures Junctures service, you do, in fact, see a diagonal underway in the recent price action of a major grain market. There, you present the following Elliott wave chart (some Elliott labels have been removed, while I took the liberty to draw a blue circle around the diagonal pattern for clarity):
JK: Yes. This is a classic diagonal unfolding in the final wave of the larger trend. As you can see, prices have put the finishing touches on wave (v) of c (circled). And, if my wave count is correct, this market’s prices are about to board the “Exciting Southbound Turn” Railway.
EWI: Thank you so much for taking the time to explain the ins and outs of your favorite structure, the diagonal. And also, for alerting readers to the possible DRAMA in store for this major grain market thanks to this Elliott wave pattern.
Learn More about Diagonals and Other Elliott Wave Patterns
Get a better understanding of Elliott wave analysis with our Elliott Wave Patterns educational feature. You’ll have access to basic lessons on Elliott wave patterns, along with video clips from our online courses which will explain the pattern, the rules and the guidelines.
Plus, you’ll see real-life examples that show you how each pattern fits into the overall wave structure. Some patterns will even offer a brief quiz to test your knowledge and ensure that you understand the material.
This article was syndicated by Elliott Wave International and was originally published under the headline Diagonal: Straight Shot to a Trading Opportunity. 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.
Elliott Wave Princple can help you identify the current trend in the market and possible turning points. When you are watching a pattern develop on a chart, how can you be sure that your wave count is correct? The Elliott Wave Principle offers rules and guidelines that you can use to add confidence to your wave count.
Elliott Wave International’s Senior Analyst Jeffrey Kennedy spent years designing his own technique to improve his accuracy. He came up with the Jeffrey Kennedy Channeling Technique, which he uses to confirm his wave counts. The following excerpt from Jeffrey’s Trader’s Classroom lessons, a regular feature of his Futures Junctures Service, offers an overview of his method.
The theory is simple: Five waves break down into three channels, and three waves need only one. The price movement in and out of these channels confirms each Elliott wave.
Figure 61 shows three separate five-wave patterns with three different channels drawn: the base channel, the acceleration channel and the deceleration channel.
The base channel contains the origin of wave one, the end of wave two and the extreme of wave one (Figure 61A). Of the three channels, the base channel is most important, because it defines the trend. As long as prices stay within the base channel, we can safely consider the price action corrective. Over the years, we’ve discovered that most corrective wave patterns stay within one price channel (Figure 62). Only after prices have moved through the upper or lower boundary lines of this channel is an impulsive wave count suitable, which brings us to the acceleration channel.
The acceleration channel encompasses wave three. Use the extreme of wave one, the most recent high and the bottom of wave two to draw this channel (Figure 61B). As wave three develops, you will need to redraw the acceleration channel to accommodate new highs.
Once prices break through the lower boundary line of the acceleration channel, we have confirmation that wave three is over and that wave four is unfolding. Wave four will often end near the upper boundary line of the base channel or moderately within the parallel lines. If prices break through the lower boundary line of the base channel decisively, it means the trend is down, and you need to draw new channels.
The deceleration channel contains wave four (Figure 61C). To draw the deceleration channel, simply connect the extremes of wave three and wave B with a trend line. Take a parallel of this line, and place it on the extreme of wave A. Price action that stays within one price channel is often corrective. When prices break through the upper boundary line of this channel, you can expect a fifth-wave rally next.
In a nutshell, prices need to break out of the base channel to confirm the trend. Movement out of the acceleration channel confirms that wave four is in force, and penetration of the deceleration channel lines signals that wave five is under way.
14 Critical Lessons Every Trader Should KnowSince 1999, Jeffrey Kennedy has produced dozens of Trader’s Classroom lessons exclusively for his subscribers. Now you can get “the best of the best” in these 14 lessons that offer the most critical information every trader should know.
Find out why traders fail, the three phases of a trader’s education, and how to make yourself a better trader with lessons on the Wave Principle, bar patterns, Fibonacci sequences, and more!
How MACD technical Indicator Can Identify Three Trade Setups By Elliott Wave International
Trading using technical indicators — such as the Stochastics, Moving Averages, MACD, for example — can do one of two things: help you or hurt you.
Elliott Wave International’s Jeffrey Kennedy explains what he loves and hates about technical indicators and shows you how he uses them to his advantage in this excerpt from his FREE eBook, The Commodity Trader’s Classroom.
I love a good love-hate relationship, and that’s what I’ve got with technical indicators. Technical indicators are those fancy computerized studies that you frequently see at the bottom of price charts that are supposed to tell you what the market is going to do next (as if they really could). The most common studies include MACD, Stochastics, RSI, and ADX, just to name a few.
The No. 1 (and Only) Reason to Hate Technical Indicators
I often hate technical studies because they divert my attention from what’s most important – PRICE.
Have you ever been to a magic show? Isn’t amazing how magicians pull rabbits out of hats and make all those things disappear? Of course, the “amazing” is only possible because you’re looking at one hand when you should be watching the other. Magicians succeed at performing their tricks to the extent that they succeed at diverting your attention.
That’s why I hate technical indicators; they divert my attention the same way magicians do. Nevertheless, I have found a way to live with them, and I do use them. Here’s how: Rather than using technical indicators as a means to gauge momentum or pick tops and bottoms, I use them to identify potential trade setups.
Three Reasons to Learn to Love Technical Indicators
Out of the hundreds of technical indicators I have worked with over the years, my favorite study is MACD (an acronym for Moving Average Convergence-Divergence). MACD, which was developed by Gerald Appel, uses two exponential moving averages (12-period and 26-period). The difference between these two moving averages is the MACD line. The trigger or Signal line is a 9-period exponential moving average of the MACD line (usually seen as 12/26/9�so don’t misinterpret it as a date). Even though the standard settings for MACD are 12/26/9, I like to use 12/25/9 (it’s just me being different). An example for MACD is shown in Figure 10-1 (Coffee).
The simplest trading rule for MACD is to buy when the MACD line (the thin line) crosses above the Signal line (the thick line), and sell when the MACD line crosses below the Signal line. Some charting systems (like Genesis or CQG) may refer to the MACD line as MACD and the Signal line as MACDA. Figure 10-2 (Coffee) highlights the buy-and-sell signals generated from this very basic interpretation.
Although many people use MACD this way, I choose not to, primarily because MACD is a trend-following or momentum indicator. An indicator that follows trends in a sideways market (which some say is the state of markets 80% of the time) will get you killed. For that reason, I like to focus on different information that I’ve observed and named: Hooks, Slingshots and Zero-Line Reversals. Once I explain these, you’ll understand why I’ve learned to love technical indicators.
Keep reading about Hooks, Slingshots, and Zero Line Reversals in The Commodity Trader’s Classroom. This free eBook is filled with 32 pages of actionable trading lessons, such as:
How to Make Yourself a Better Trader
How the Wave Principle Can Improve Your Trading
When to Place a Trade
How to Identify and Use Support and Resistance Levels
How to Apply Fibonacci Math to Real-World Trading
How to Integrate Technical Analysis into an Elliott Wave Forecast
You may be missing trading opportunities that are staring you in the face. The charts you look at every day could reveal high-confidence trade setups and market turning points, and you can learn how to find them, today.
Elliott Wave International (EWI) has just released a free eBook, How You Can Use Fibonacci to Improve Your Trading.
It features 14 chart-filled pages that explain Fibonacci and provide practical tools to help you formulate and execute your own trading strategy by combining wave analysis with Fibonacci relationships. You’ll never look at charts the same way again!
Created from a $129 two-volume eBook by EWI, this valuable report is offered free until February 6.
Don’t miss out on this opportunity to learn how Fibonacci can change the way you trade forever.