Better Trader

Technical Analysis: MACD

MACD (Moving Average Convergence Divergence)

The MACD is the difference between a 26 day and a 12 day exponential moving average. A 9 day exponential moving average of the MACD called "the signal line" is plotted on top of the MACD to show buy/sell signals.
In sideways markets, buy when the MACD rises above its signal line, sell when the MACD falls below its signal line.

MACD Divergence:

In a trending market, the MACD is used to idenfify market tops or market bottoms. A bearish divergence occurs when prices make a new high while the MACD is lower. A bullish divergence occurs when prices make a new low while the MACD is higher.

Technical Analysis: Relative Strength

Relative strength (comparative) compares two securities to show how they are performing relative to each other. A security's price change is compared to another security's price change (the base security).

The relative strength is the pink line at the bottom of the chart. When the relative strength moves up prices are outperforming the base security (performing better than the base security), when the relative strength moves down prices are underperforming (performing worse than the base security). When the relative strength moves sideways both securities are performing the same.

For example if we compare Diageo to the FTSE 100, Diageo is the main security, the FTSE 100 is the base security. The relative strength is calculated by dividing Diageo's price by the FTSE 100 price.

 

In this example Diageo performed better than the FTSE 100 after 23rd January (rising relative strength).

Note: Do not confuse relative strength with Relative Strength Index (RSI) which is a different indicator.

How To Trade A Channel

This is an example of a trend channel in a downtrend:

Prices are trading between two parallel lines. Always trade in the direction of the channel.  In a downtrend use the upper line to initiate short positions.  In an uptrend use the lower line to initiate long positions.

More aggressive traders might initiate countertrend positions by buying near the lower line in a downtrend and selling near the upper line in an uptrend. Whether in an uptrend or downtrend the price target is the vertical width of the channel.

Warning Sign:

Failure to reach the upper line in an uptrend is often accompanied by the breaking of the lower line.
Failure to reach the lower line in a downtrend is often accompanied by the breaking of the upper line. A price target is calculated by projecting the width of the channel (x) from the breakout point.

Technical Analysis: Double Top

The uptrend ends with two highs (a) and (c) at the same level.  The double top is completed when prices break below (b).  A price target is calculated by projecting the depth of the pattern (x) from the breakout point.

Technical Analysis: Ending Diagonal

The ending diagonal is a wedge [1,2,3,4,5] with two converging trendlines occurring in the fifth wave. But it can also appear in the C wave of an A-B-C zigzag. Each subwave [1,2,3,4,5] subdivides into three waves. For example if we zoom in on any of the five waves using a smaller time period, we should see a three-wave pattern. 

Sometimes subwave 5 will move beyond the upper trendline (in bull market) or the lower trendline (in bear market). It is called a throw-over.

Technical Analysis: Head And Shoulders

The head and shoulders pattern can occur at the end of an uptrend (reversal) or in the middle (continuation).

The high of the rally is the head (H). The two shoulders S1 and S2 are the lower highs on each side. The pattern is complete with the breaking of the neckline.

The breaking of the neckline is a sell signal. A minimum price target can be calculated by measuring the distance between H and the neckline and projecting it downward from the point where the neckline was broken.

Technical Analysis: Descending Triangle

The descending triangle has a horizontal lower line (support) and is a continuation pattern. Once the support is broken, prices continue to move lower. The base of the triangle (x) is projected from the breakout point to calculate a price target.

Technical Analysis: Inverse Head And Shoulders

See definition