Successful Stock Trading Methodology

The Three Phases of a Trader's Education
Learn Jeffrey Kennedy's tips for becoming a consistently successful trader 
March 12, 2012

By Elliott Wave International

You've probably heard talk about "market uncertainty" in the financial news recently. But when are the market trends ever certain? The constant uncertainties contribute to your frustrations as a trader, and you need to have a method for dealing with the ups and downs. Every successful trader has one.
Since 1999, Elliott Wave International's senior analyst and trading instructor Jeffrey Kennedy has produced hundreds of trading lessons exclusively for his subscribers. One of these lessons, "The Three Phases of a Trader's Education," gives you Jeffrey's tips on becoming a consistently successful trader.
Here it is; we hope you'll find it helpful.

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The Three Phases of a Trader's Education:
Psychology, Money Management, Method

Aspiring traders typically go through three phases in this order:

1. Methodology -- The first phase is that all-too-familiar quest for the Holy Grail -- a trading system that never fails. After spending thousands of dollars on books, seminars and trading systems, the aspiring trader eventually realizes that no such system exists.
2. Money Management -- So, after getting frustrated with wasting time and money, the up-and-coming trader begins to understand the need for money management, risking only a small percentage of a portfolio on a given trade versus too large a bet.
3. Psychology -- The third phase is realizing how important psychology is -- not only personal psychology but also the psychology of crowds.

But it would be better to go through these phases in the opposite direction. I actually read of this idea in a magazine a few months ago but, for the life of me, can't find the article. Even so, with a measly 15 years of experience under my belt and an expensive Ph.D. from S.H.K. University (i.e., School of Hard Knocks), I wholeheartedly agree. Aspiring traders should begin their journey at phase three and work backward.
I believe the first step in becoming a consistently successful trader is to understand how psychology plays out in your own make-up and in the way the crowd reacts to changes in the markets. The reason for this is that a trader must realize that once he or she makes a trade, logic no longer applies. This is because the emotions of fear and greed take precedence -- fear of losing money and greed for more money.
Once the aspiring trader understands this psychology, it's easier to understand why it's important to have a defined investment methodology and, more importantly, the discipline to follow it. New traders must realize that once they join a crowd, they lose their individuality. Worse yet, crowd psychology impairs their judgment, because crowds are wrong more often than not, typically selling at market bottoms and buying at market tops.
Moving onto phase two, after the aspiring trader understands a bit of psychology, he or she can focus on money management. Money management is an important subject and deserves much more than just a few sentences. Even so, there are two issues that I believe are critical to grasp: (1) risk in terms of individual trades and (2) risk as a percentage of account size.
When sizing up a trading opportunity, the rule-of-thumb I go by is 3:1. That is, if my risk on a given trading opportunity is $500, then the profit objective for that trade should equal $1,500, or more. With regard to risk as a percentage of account size, I'm more than comfortable utilizing the same guidelines that many professional money managers use -- 1%-3% of the account per position. If your trading account is $100,000, then you should risk no more than $3,000 on a single position. Following this guideline not only helps to contain losses if one's trade decision is incorrect, but it also insures longevity. It's one thing to have a winning quarter; the real trick is to have a winning quarter next year and the year after.
When aspiring traders grasp the importance of psychology and money management, they should then move to phase three -- determining their methodology, a defined and unwavering way of examining price action. I principally use the Wave Principle as my methodology. However, wave analysis certainly isn't the only way to view price action. One can choose candlestick charts, Dow Theory, cycles, etc. My best advice in this realm is that whatever you choose to use, it should be simple. In fact, it should be simple enough to put on the back of a business card, because, like an appliance, the fewer parts it has, the less likely it is to break down.

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14 Critical Lessons Every Trader Should Know Read more of Jeffrey Kennedy's lessons in his 45-page eBook, The Best of Trader's Classroom. Find out why traders fail and how to make yourself a better trader with lessons on the Wave Principle, bar patterns, Fibonacci sequences, and more when you download your FREE eBook today! Don't miss your chance to improve your trading. Download your free eBook here.

FREE Forex Trading Analysis

Forex Market Insight: EUR/USD Rallies...Why?
Elliott wave patterns suggested a bullish reversal a day before the rally
February 23, 2012

By Elliott Wave International

On February 16, EUR/USD, the euro-dollar exchange rate and the most actively traded forex pair, surged over 170 pips, from below $1.30 to above $1.3150.
The explanations for the strong rally boiled down to "hopes" that the Greek bond-swap deal would be reached.
As we've pointed out before, explanations such as these make sense only in retrospect. They tell you nothing about tomorrow's trend.
On February 15, while EUR/USD was still in the downtrend, Elliott Wave International's forex-focused Currency Specialty Service posted the following intraday forecast:

EURUSD (Intraday)
Posted On: Feb 15 2012 1:28PM ET / Feb 15 2012 6:28PM GMT
Last Price: 1.3068
[Approaching a bottom]
The decline from 1.3322 looks mature, though there is no evidence it is complete. Allow for a dip below 1.3027 (to complete a flat correction) but we're focusing on identifying the upcoming reversal. A rally in five waves at small degree would do the trick.

As expected, EUR/USD indeed dropped below $1.3027 before reversing upward on February 16.
The bullish February 15 forecast was based strictly on the Elliott wave pattern you see in the chart above. The converging trendlines labeled (i)-(ii)-(iii)-(iv)-(v) mark an ending diagonal triangle, which only forms when the trend gets exhausted, and a reversal is near.
This Elliott wave pattern warned one day before the EUR/USD rally began that the collective bias of the forex players about the euro would soon shift from bearish to bullish.
See our forex-focused Currency Specialty Service in action for yourself -- FREE -- during EWI's Forex FreeWeek. Details below.

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Now through noon Eastern time February 29, you can get a full week of FREE access to EWI's trader-focused Currency Specialty Service (valued at $494/month). That means you'll get to see all the charts, analysis, videos and forecasts for the world's most traded currency pairs -- at ZERO cost to you! Access FOREX FreeWeek now >>

Applying Fibonacci Retracements to Stock trading

Learn How to Apply Fibonacci Retracements to Your Trading
EWI's new eBook helps you identify trading opportunities
February 8, 2012

By Elliott Wave International

Elliott waves often correct in terms of Fibonacci ratios. The following article, adapted from the eBook How You Can Use Fibonacci to Improve Your Trading, explains what you can expect when a market begins a corrective phase. Learn how you can read the entire 14-page eBook below.

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Retracements -- Corrective Waves

If we look on the left side of this chart, we see a diagram of wave 1 followed by wave 2. It is common for second waves to retrace .618 of wave 1 -- thereby making a deep retracement. We will also be looking for .786. We might often see .5, 50%, but .618 is common. On the right side, fourth waves will commonly retrace a smaller percentage or .382 of wave 3. We might also see something like .236.
Examples
I have put the wave count on this chart of the S&P 500. We have waves 1, 2, 3, 4 and 5. Wave 2 is an expanded flat. Wave 4 is a zigzag. Let's look at the retracements that waves 2 and 4 make.

We see that wave 2 makes a deep retracement. It comes close to .618. Look at this Fibonacci table that I put up; notice that I put .382, .5, .618, and .786. .618 is 1087.75, and the S&P low is 1090.19.

We see that wave 4 makes a shallow retracement of wave 3. It goes just beyond the .382 retracement. .382 is 1169.1, and wave 4 actually bottoms at 1163.75.
In a nutshell, this is what we mean when we say that Elliott waves often correct in terms of Fibonacci ratios.

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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 the entire 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 And more! See how easy it is to use Fibonacci in your trading. Download your free eBook today >>

the Credit Crisis and the U.S. Dollar

How Does the Value of the U.S. Dollar Fit Into the Big Picture for the Economy?
Robert Prechter discusses his views on the credit crisis and the U.S. dollar
January 31, 2012

By Elliott Wave International

More credit is denominated in U.S. dollars than any other currency. What does this mean for the value of the dollar as the credit crisis continues its strangle-hold on the world economies?
Enjoy this video clip of Bob Prechter from an October interview with The Mind of Money host Douglass Lodmell, in which Bob discusses the debt implosion and the value of the U.S. dollar.
You can watch Prechter's full 45-minute interview here -- no sign up required!

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Watch the full 45-minute interview FREE Get even more valuable insights as Mind of Money host Douglass Lodmell interviews Elliott Wave International's President, Robert Prechter, about how to keep your money safe, the deflation versus inflation debate, and many more topics that are critical to your financial future. Start watching the free 45-minute interview now -- no sign up required!

New Year, New High Hopes for Stocks

January 11, 2012

By Elliott Wave International

You can probably relate: Every year, come January 1, I just can't help but feel that "every little thing is gonna be all right," as Bob Marley sang.
This year, the mainstream financial community is sharing the same sentiment. Here's how EWI's Steve Hochberg summarized it [emphasis added]:

At its conclusion, 2011 was marked by back-and-forth stock swings that resulted in essentially a flat market. My Bloomberg screen shows that the DJIA ended up 5.53% for the year, the S&P was flat...while the NASDAQ was down 1.80%. The broadest aggregate measure of stock market performance, the DJ Wilshire 5000, which includes nearly all stocks that trade, ended 2011 down 1%.
The Dow's action masks a strongly negative stock market performance overseas. For instance, in U.S. dollar terms, the Euro Stoxx 50 Index was down nearly 20% in 2011, with the FTSE down almost 6%, the French CAC off almost 20% and the German DAX down over 17%. Asian markets were also hit hard. The S&P Asia 50 lost over 15%, the Nikkei declined 13%, the Hang Seng was off 20%, the Shanghai Composite ended 2011 down over 18%, while Australia was lower by 14%. All were down in euro terms, too.
But not to worry: a recent USA Today article notes that a "quick survey of New Year's prognostications from investment strategists suggests stocks might deliver the double-digit gains that they have put up, on average, over the long term. A snapshot of 2012 year-end-price targets from five firms shows an average gain of 10.5% for stocks."

Very optimistic, indeed!
Except, when have we heard that kind of talk before?
Hochberg continues:

The "10.5%" forecasted gains for the coming year is interesting because it is almost exactly the average forecasted gains for stocks for 2011, as the subheading in the following Barron's cover story from December 2010 shows.

That's right. A year ago, forecasts for stocks in 2011 were just as optimistic as they are now for 2012 -- and largely for the same reasons: improving economy, recovering real estate and jobs markets, and a host of other "better fundamentals."
From an Elliott wave perspective, the reason 2011 mainstream financial forecasts fell flat was simple: Stocks don't follow the economy. It's the other way around: The economy follows stocks.
What's Really Ahead for 2012? There is a lot of optimism building around the stock market, but is it based on sound analysis or hope created by recent economic news reports? Elliott Wave International has released a free report to help you navigate the markets and prepare for what's ahead. You'll get hard facts, 25 eye-opening charts and 14 pages of straightforward commentary that will help you see the "big picture" so you can position yourself for the years to come.
Download The Most Important Investment Report You'll Read for 2012 now.

Why you should Choose the Wave Principle

Why Choose the Wave Principle?
Robert Prechter reveals why he embraced the Wave Principle.
January 4, 2012

By Elliott Wave International

Robert Prechter is the widely recognized authority on the Elliott Wave Principle.
Read how he learned about the Wave Principle and why he embraced it in the edited excerpt from his book Prechter's Perspective below (Q&A format):

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Question: What was it about Elliott that captured your attention?
Robert Prechter: I had seen some mentions of the Wave Principle in a few market newsletters and a couple of obscure books, and I decided that either this was someone's elaborate fantasy or it was an amazing discovery. I wanted to reject it from what evidence I could find or include it as part of my growing arsenal of technical analytical methods.
Q: How long did it take you to develop your "eye" for discerning these waves?
RP: About 30 minutes -- when I plotted my first hourly chart covering a few months. Apparently, there is such a thing as an eye for patterns. One person told me he had trouble finding the fives and threes. The key is to keep a chart. Most people have no trouble seeing the Principle at work. Q: You accepted it just like that?
RP: When you begin to see the five-wave impulses and the three-wave corrections unfold over and over, it does not take long for you to say either "I see, but I refuse to believe it," or "This is obviously what's happening; let's see how far it continues." It took about a year and a half of applying it until I knew that Elliott was absolutely right. I'm pretty hard-headed, and it takes substantial reason for me to accept a new idea. By that time, I decided I had seen what amounted to proof. I then said to myself, "This is unbelievable. How come no one is commenting on this? The market is pulling back to points he said it should pull back to in the patterns. It is rising up to levels he said it should, in ways he said it should."
Q: What was it that convinced you?
RP: The Wave Principle proves itself when you merely keep a chart. Once I did that, I recognized what was going on rather quickly. The wave patterns are repetitive and at times, over protracted periods, they are easily discernible.

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The basic Elliott wave pattern consists of impulsive waves (denoted by numbers) and corrective waves (denoted by letters). An impulsive wave is composed of five subwaves and moves in the same direction as the trend of the next larger size. A corrective wave consists of three subwaves and moves against the trend of the next larger size.
As the chart below shows, these basic patterns link to form five- and three-wave structures of increasingly larger size.

The Elliott Wave Principle helps to identify turning points in the trends of financial markets.
It does not provide certainty, yet the Wave Principle does provide a way to assess the probabilities of possible future paths of a given financial market.

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Learn more in the free Elliott Wave Basic Tutorial The Elliott Wave Basic Tutorial is a 10-lesson comprehensive online course with the same content you'd receive in a formal training class -- but you can learn at your own pace and review the material as many times as you like! Get 10 FREE Lessons on The Elliott Wave Principle that Will Change the Way You Invest Forever

Your Working Helps Me .. My Working Helps You

"Your Work Helps Me in a Very Practical Way"
Prechter talks with Mind of Money Host Doug Lodmell
November 09, 2011

By Elliott Wave International

Robert Prechter offers a broad overview of the Wave Principle in this interview clip with The Mind of Money host, Douglass Lodmell. As Bob explains, "The work we do is so different from what other people do." Enjoy listening to Bob explain how the Wave Principle differs from fundamental analysis and how it can help you to
anticipate important turns and changes in the markets.

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Learn the Why, What and How of Elliott Wave Analysis Financial media use news and economic events to explain market moves. Steer clear of this misguided approach. Learn what really moves the markets with The Elliott Wave Crash Course. In this series of three FREE videos, Senior Tutorial Instructor Wayne Gorman demolishes the widely held notion that news drives the markets. Each video will provide a basis for using Elliott wave analysis in your own trading and investing decisions.

This

a Deflationary Depression ahead

America's First Deflationary Depression: Is a Bigger One Ahead?
Social psychology precipitates economic depressions 
November 07, 2011

By Elliott Wave International

Don't blame Martin Van Buren for America's first deflationary depression. Social mood rode higher in the saddle than did our 8th President, who only stood 5' 6".
Elected in 1836, by the time Van Buren assumed office in March 1837 a speculative bubble had burst and a banking crisis was at hand (sound familiar?) -- the national mood had turned south and the "Panic of 1837" followed. Van Buren was known as "The Little Magician," but he could not pull an economic recovery out of the hat. He met defeat seeking a second term.
America's first deflationary depression lasted until 1842. Van Buren blamed over-zealous business practices and a credit bubble (sound familiar 2x?). The panic precipitated bank failures; many speculators who bought land to capitalize on railroad expansion lost everything. The depression worsened as Van Buren continued Andrew Jackson's economic policies. Businesses failed and unemployment was widespread. There were even "food riots" in several cities.
(Author's note: Because of substantial revenue inflows into the Treasury during the boom of the early 1830s, the United States government became debt free in 1835. Ironically, this was the very year the depression began. Stock prices fell sharply despite the federal government paying off all of its debt. Conventional wisdom would have us believe reducing the national debt, or paying it off entirely, would lift stock prices. It didn't happen in 1835, so there must be something else at work. That "something else" is social mood.)
The 1837-1842 deflationary depression comprised Supercycle Wave II, the end of which saw the beginning of the biggest economic expansion in history -- Supercycle wave III! The 1929-1933 Great Depression still grabs more attention, but in fact the earlier Supercycle Wave II decline set the stage for the United States becoming the greatest economic and military power the world has ever known.
President Herbert Hoover held office during the 1929 Crash and onset of the Great Depression, a.k.a. Supercycle Wave IV. Yet no U.S. President has thus far been at the helm during a Grand Supercycle market decline. The last decline of that degree had its origin in the South Sea Bubble in 1720, when Great Britain's King George I was on the throne. The rampant speculation of the time spread beyond the financial class, such that porters and ladies' maids had enough money to buy their own carriages. Members of the clergy took part in the mania. Poof! Life savings were wiped out. England's Postmaster General committed suicide. Hundreds of members of Parliament lost money. As for the directors of the South Sea Company itself, they were forced to give up their property and arrested to boot.
Martin Van Buren led the nation during our country's first Supercycle depression -- as President he was powerless to stop it. Who will occupy the Oval Office when the next Grand Supercycle depression develops? This we believe: That individual will be powerless to prevent it. He or she will only be a President.
What is more powerful than a President of the United States? The answer is "social mood." How is this powerful force shaping the economy?
Discover the answer in the 90-page Free Report called the Deflation Survival Guide.

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Now is the time to prepare for a deflationary depression. Start by reading the 90-page free eBook, Deflation Survival Guide, which includes Robert Prechter's most important analysis and forecasts regarding deflation. This guide will help you survive a major deflationary trend, and even equip you to prosper. Download your free eBook, the Deflation Survival Guide, now >>

These are the Best Technical Indicators for Trading

What Are the BEST Technical Indicators for Successful Trading?
8 technical analysis tools that give any trader an edge
November 14, 2011

By Elliott Wave International

You may have seen a TV ad where "traders" describe their strategies, and one says, "I trade on fundamentals." That sounds very reassuring -- except that, on any given day, "fundamentals" are a mixed bag:

• You might have a good U.S. employment report...but bad news from Europe
• A positive Fed statement...but a negative housing number
• Strong earnings...but slowing consumer spending

And so on. Which "fundamental" factor trumps the other? Which one carries more weight in your forecast? Your guess is as good (or bad) as anybody's.
Your alternative is technical analysis, which forecasts the markets' short- and long-term moves based on objective metrics, not guesses.
Here at EWI, we've always strived to help our readers learn to think for themselves. So we've put together for you a free 8-lesson report, "Best Technical Indicators for Successful Trading" that teaches you how to use these technical tools:

1. The Personality of Elliott Waves
2. Head and Shoulders Pattern
3. Fibonacci Retracements
4. Advance-Decline Line
5. Sentiment
6. Volume
7. Trendlines
8. Momentum Analysis Using MACD

Here's a small preview of this free 8-lesson report.

Trendlines

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, as it was in the upwards sloping line in Figure 1-1 or extremely pessimistic, as it was in the downwards sloping line in the same figure.

Now we're on to the fun part -- drawing trendlines. You can do this several different ways...

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Finish Reading This 8-Lesson Report Today, FREE In this free report, you will learn some of the most effective tools of the trade from analysts at Elliott Wave International, the world's largest technical analysis firm. 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. Download your "Best Technical Indicators" report now >>

the Myth of Corporate Earnings being a Market Driver

Earnings: Stock Market's Brightest False Beacon
"Earnings estimators are too pessimistic at bottoms and too optimistic at tops," explains EWI's president Robert Prechter 
November 03, 2011

By Elliott Wave International

Four times a year, investors and Wall Street watch the quarterly corporate earnings reports, trying to anticipate the trend in stocks. Another earnings season is upon us right now, so read this excerpt from our free Club EWI report, "Market Myths Exposed."

"Myth No. 1 -- 'The bottom line is earnings drive stock prices' -- Investopedia.com.

"It's simply not true. The flawed notion that profits drive stock prices is something that EWI has discussed numerous times over the years. For one thing, quarterly earnings reports announce a company's achievements from the previous quarter. The trends in earnings and stock prices sometimes even move in opposite directions, such as in the 1973-74 bear market when S&P earnings rose every quarter as the S&P declined 50%. More recently, earnings have been cycling with stocks, but that still leaves the problem of reporting delays, which leave investors eating the market's dust when the trend changes.



"To try to get around this, pundits use analysts' estimates of future earnings as a guide. In doing so, however, they are subject to the same herding impulses as investors. As [Robert Prechter's] Conquer the Crash puts it, 'Earnings estimators are too pessimistic at bottoms and too optimistic at tops, just when you most need the indicator to tell the truth.'"

The S&P earnings hit a new record in Q2 of this year. This chart from our September 2011 Elliott Wave Financial Forecast puts them next to the Dow. Observe when the previous high in earnings took place:

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Market Myths Exposed, a FREE ebook from Elliott Wave International, uncovers 10 of the most common misconceptions about the markets that can affect your investment decisions. Learn the truth about inflation and deflation, the FDIC, diversification, speculation and more in this 33-page eBook. Get valuable insights you won't find anywhere else. Download your free eBook >>

Evaporation of Wealth

Evaporation of Wealth on a Vast Scale
How $1-million can disappear
September 19, 2011

By Elliott Wave International

The bursting of the "debt bubble" which started in 2008 is far from over.

It's the financial story of our age and it's happening before our eyes. The full scope is hard to keep up with because it's unfolding at various levels.

The top level is the sovereign debt crisis:

• National governments: Several in Europe and even the U.S.
• State and local governments: services slashed; vendors waiting to get paid.
• Corporations: financial institutions at home and abroad remain in questionable health. PIMCO Chief tells Bloomberg (9/13) "We're getting close to a full-blown banking crisis in Europe." And CNBC reports (9/14) "Moody's Investors Service said...it downgraded the credit ratings of Societe Generale and Credit Agricole."
• Individual Households: "under-water" mortgages; "new conservatism" toward spending.

As the credit bubble continues to deflate, the evaporation of vast wealth may follow on a historic scale. Please read this excerpt from the second edition of Conquer the Crash (pp. 94-95):

"...a lender starts with a million dollars and the borrower starts with zero. Upon extending the loan, the borrower possesses the million dollars, yet the lender feels that he still owns the million dollars that he lent out. If anyone asks the lender what he is worth, he says, 'a million dollars,' and shows the note to prove it. Because of this conviction, there is, in the minds of the debtor and the creditor combined, two million dollars worth of value where before there was only one. When the lender calls in the debt and the borrower pays it, he gets back his million dollars. If the borrower can’t pay it, the value of the note goes to zero. Either way, the extra value disappears...

"The dynamics of value expansion and contraction explain why a bear market can bankrupt millions of people. At the peak of a credit expansion or a bull market, assets have been valued upward, and all participants are wealthy -- both the people who sold the assets and the people who hold the assets. The latter group is far larger than the former, because the total supply of money has been relatively stable while the total value of financial assets has ballooned. When the market turns down, the dynamic goes into reverse. Only a very few owners of a collapsing financial asset trade it for money at 90 percent of peak value. Some others may get out at 80 percent, 50 percent or 30 percent of peak value. In each case, sellers are simply transforming the remaining future value losses to someone else. In a bear market, the vast, vast majority does nothing and gets stuck holding assets with low or non-existent valuations. The 'million dollars' that a wealthy investor might have thought he had in his bond portfolio or at a stock’s peak value can quite rapidly become $50,000 or $5000 or $50. The rest of it just disappears. You see, he never really had a million dollars; all he had was IOUs or stock certificates. The idea that it had a certain financial value was in his head and the heads of others who agreed. When the point of agreement changed, so did the value. Poof! Gone in a flash of aggregated neurons. This is exactly what happens to most investment assets in a period of deflation."

Now is the time to prepare for a deflationary depression by reading the 90-page Free Report titled Deflation Survival Guide. This eBook is now updated with Robert Prechter's most important analysis and forecasts regarding deflation. You can read this free financial guide right away as a Club EWI Member (membership is free). Joining Club EWI is easy and just takes moments. See the Deflation Survival Guide on your screen by following this link>>

How to Find Potential Trade Setups

How to Find and "Hook" Potential Trade Setups
A Free Lesson on How to Combine Technical Indicators with Elliott Wave Analysis 
July 11, 2011

By Elliott Wave International

Trading using technical indicators -- such as the MACD, for example, Moving Average Convergence-Divergence -- can do one of two things: help you or hinder you.
Using them as a forecasting method alone can be about as predictable as flipping a coin. But when you combine them with other forms of technical analysis (i.e. the Wave Principle), the same MACD can be your new best friend.
Technical indicators are meant to do exactly what the name implies: "indicate" that a buy or sell signal may be in place. (Don't confuse "indicate" with "guarantee": They are not called "technical guarantors" for a reason.)
Elliott Wave International's Futures Junctures editor Jeffrey Kennedy shows you how he uses technical indicators to his advantage in his FREE eBook,The Commodity Trader's Classroom:

"Rather than using technical indicators as a means to gauge momentum or pick tops and bottoms, I use them to identify potential trade setups."

Jeffrey goes on to describe his favorite indicator, the MACD:

"Out of the hundreds of technical indicators I have worked with over the years, my favorite study is the MACD [which] 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."

Figure 10-1 gives you an example of the MACD indicator in Coffee futures.

One of the signals of a potential trade setup that the MACD often introduces is what Jeffrey refers to as the Hook. Here's another quote from the free eBook:

"A Hook occurs when the MACD line penetrates, or attempts to penetrate, the Signal line and then reverses at the last moment. In addition to identifying potential trade setups, you can also use Hooks as confirmation. Rather than entering a position on a cross-over between the MACD line and Signal line, wait for a Hook to occur to provide confirmation that a trend change has indeed occurred. Doing so increases your confidence in the signal, because now you have two pieces of information in agreement."

Figure 10-4 gives you an example of the Hook at work in live cattle futures.

"A Hook should really just be a big red flag, saying that the larger trend may be ready to resume. It’s not a trading system that I follow blindly. All I'm looking for is a heads-up that the larger trend is possibly resuming."

Learn more about other technical indicators that you can use to your advantage, as well as the other important lessons in the FREE 32-page eBook, The Commodity Trader's Classroom. It is filled with actionable lessons you can apply to your trading strategy. Download it right now, instantly, when you create your free Club EWI profile.

DOW Jones Industrials Below 12,000 !!

Six Straight Weeks of Decline Take DJIA Below 12,000: What Now?
Before blaming falling stocks on the most recent weak economic reports, let's check some dates 
June 14, 2011

By Elliott Wave International

As of June 10, the Dow has suffered the "longest losing streak since the fall of 2002. The market's last seven-week stretch of losses began in May 2001, as the dot-com bubble deflated," reports The Associated Press.
As for why stocks are falling, most observers agree: Blame "weaker hiring, industrial output, and a moribund housing market." The economic reports from the past two weeks made that clear.
But wait a minute. The DJIA didn't top in the past two weeks -- it topped on April 29. At the time:

• U.S. unemployment benefit applications had been trending down/flattening. In fact, "The unemployment rate fell last month in more than 80% of the nation's largest metro areas," said an April 27 AP report.
• U.S. industrial output was up. In fact, "both the Philly and N.Y. Fed reports show[ed] improving manufacturing and business conditions." (Reuters, April 15)
• As for the U.S. housing market, it officially entered the "double-dip recession" zone only on May 31, a month after the Dow's April 29 peak. 

This is not to say that unemployment, manufacturing and real estate were peachy in April. But the worst of the reports from those areas of the economy only came after the stock market had already entered the decline. The most recent weak economic reports hardly explain why stocks topped when they did.
If you're looking for a better explanation, consider an Elliott wave perspective: The economy doesn't lead the stock market -- it's the stock market that leads the economy.
Skeptical? Then think back to 2007. "Goldilocks economy," strong corporate earnings, unemployment at 4.4% -- nothing but blue skies ahead. The Dow rallies to an all-time high above 14,000 in October 2007 -- and over the next 18 months goes on its biggest losing streak in 70+ years, falling 54% and ushering in "the Great Recession."
Now fast forward to March 2009. The Dow has crashed below 6,500; unemployment has more than doubled; the desperate Fed has dropped interest rates to 0%; foreclosures; bailouts; consumer confidence at an all-time low; general state of near-panic. The Dow bottoms on March 6, 2009, and stages a powerful two-year rally above 12,000.
By conventional logic, you'd have to agree that, paradoxically, "the good economy" of 2007 prompted the deflationary crash, while "the bad economy" of 2009 sent stocks flying.
But here's an explanation that actually makes sense: Broad market trends are not created by the economic conditions -- social mood is what creates them. Social mood doesn't depend on what Ben Bernanke had for breakfast -- it changes for endogenous reasons, and those changes follow the Elliott wave model. Stocks lead the economy because they are quicker to register changes in social mood.

Before you make investment decisions based on the latest economic report, be sure to read the 2011 edition of The Independent Investor eBookby Elliott Wave International. You will see example after example of the fallacy to the belief that economic conditions direct the moves in the stock market.  Download your free 50-page Independent Investor eBook now.