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How To Combine Trading Indicators (For Forex, Crypto & Stock Market) - YouTube
Channel: The Secret Mindset
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Knowing what indicators to use and what is
the best combination of technical indicators
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can dramatically improve your chart reading
skills.
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If you use the wrong technical indicators,
this can lead to inaccurate price interpretation
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and bad trading decisions.
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Technical indicators can make it easy for
you to identify current price trends and predict
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where prices will move in the future and by
developing effective technical analysis strategies,
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you can increase the amount you earn each
trading day.
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When it comes to indicators, we can divide
them into four classes:
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⢠Trend-following indicators
⢠Momentum indicators
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⢠Volume indicators
⢠Volatility indicators
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Trend indicators â trend indicators are
designed to measure the strength and direction
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of a trend.
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If a market is in a strong uptrend, a trend
indicator gives you a buy signal, and if the
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market is in a strong downtrend, trend indicators
give you a sell signal.
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However, since indicators are based on past
price-data, most trend indicators lag the
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price and give trading signals after a trend
has already been established.
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This means a trader will likely miss the initial
move of a new trend until a trend indicator
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sends a trade signal.
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Popular trend indicators include moving averages,
parabolic stop and reverse (Parabolic SAR),
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average directional movement index (ADX) and
the moving average convergence divergence
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(MACD).
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Momentum indicators / oscillators â another
popular group of technical indicators are
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momentum indicators, also called oscillators.
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Unlike trend indicators, oscillators measure
the relative strength of recent price-moves
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and plot a value between 0 and 100 â hence
their name.
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If prices are rising strongly, an oscillator
follows and reaches overbought levels, giving
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you a sell signal.
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Similarly, if prices are falling, an oscillator
reaches oversold levels and sends a buy signal.
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Oscillators work extremely well in ranging
markets but lead to whipsaws when markets
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are trending.
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Popular oscillators include the relative strength
index (RSI), stochastic indicator and momentum
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oscillator.
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Volume indicators â volume indicators measure
the strength of a price-move by using the
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information of trading volume.
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While volume indicators are very popular among
stock traders, forex traders canât take
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much advantage of them since thereâre no
reliable measures of trading volume in the
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currency market.
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Popular volume indicators are the Chaikin
Oscillator and on-balance volume (OBV).
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Volatility indicators â as their name suggests,
volatility indicators measure the rate of
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price-changes regardless of their direction.
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Volatility indicators rise when markets are
fast and fall when markets are slow.
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Popular volatility indicators include Bollinger
Bands and the average true range (ATR).
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As you can see, while these categories of
indicators are trying to determine the same
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thingâwhether prices are about to increase,
decrease, or remain stableâthe angle they
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each offer is unique.
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Looking at the market from multiple different
angles can help you develop a more accurate,
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realistic, and actionable perspective.
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Knowing which one belongs to which category,
and how to combine the best indicators in
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a meaningful way can help you make much better
trading decisions.
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What you need to realize is that, while all
technical indicators are useful, they each
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have their own set of weaknesses.
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And, combining indicators in a wrong way can
lead to a lot of confusion, wrong price interpretation
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and to bad trading decisions.
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The biggest problem with traders is the fact
they use different indicators which belong
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to the same indicator class and then show
the same information their charts.
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If you take a look at this chart, we added
3 momentum indicators (MCD, RSI and Stochastic).
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Essentially, all 3 indicators provide the
same information because they examine momentum
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in price behavior.
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You can see that all indicators rise and fall
at the same time, turn together and also are
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flat during no-momentum periods.
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So, if you trade with a multi-indicator strategy
that uses the RSI indicator, MACD indicator
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and the stochastic indicator you are basically
using 3 types of technical indicators that
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belong in the same category.
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These are all momentum indicators that are
going to display the same kind of information
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in one way or the other.
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Another common mistake is using only trend
indicators.
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This example shows a chart with 3 trend indicators
(Parabolic SAR, moving averages and Keltner
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channels).
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Again, the purpose of these indicators is
the same: identifying trend direction.
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You can see that during a trend, all indicators
are practically indicating the same thing.
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At the same time, during ranges, they all
offer bad signals.
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I hope you see the problem with adding multiple
indicators showing the same information, you
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will end up giving too much weight to the
information provided by the indicators and
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you can easily miss other crucial things.
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You might use 2 or more trend indicators and
you might believe that the trend is stronger
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than it actually is because both of the indicators
will give you the green light and you might
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miss other important clues on your charts.
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The problem with using unfitting technical
indicators is that you might actually think
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the trade signals are stronger if all indicators
point in the same direction.
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And this is completely wrong!
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The fix to the over-emphasizing information
from using indicators that belong to the same
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group is quite simple.
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Avoid using technical indicators that display
the same kind of information.
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The best strategy with multiple indicators
combine indicators that show a different type
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of information.
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And hereâs another common mistake: using
way too many indicators.
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Tell me if this sounds familiar: you find
a strategy or an indicator on a forum or here
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on Youtube.
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You decide to back test it on a demo.
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You take a look at your charts and spot a
few good entries.
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The only problem is that itâs missing somethingâŚ
yes, a few more indicators, filters to keep
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you out of bad trades.
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What can you do?
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Thereâs only one answer: add more indicators.
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But which one?
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No problem, you open your trusty folder of
indicators and start trying out different
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ones.
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You back test again: now the strategy gives
better results⌠but still you have some
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losses and since you are on a quest for the
Holy Grail, you add another âfilterââŚ.
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And another⌠and another, until you realize
your charts start to resemble a Christmas
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tree.
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And now youâre more confused than ever.
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Some indicators say âshortâ while others
say âlongâ and by the time they all agree,
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price moved 50 pips and itâs too late to
enter.
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Whatâs worse, you realize you started with
a potentially good strategy and modified it
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almost completely.
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I suffered from the same problem, donât
worry.
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We all did.
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You donât need to clutter your charts.
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Less is more.
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You might still have a strong belief that
each indicator on your chart serves an essential
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purpose and you cannot trade without all of
them.
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You donât need to transform yourself into
a price action trader, but if your results
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are not great, get rid of some indicators,
youâll see that your mind will be more active
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and youâll start to analyze price movement
from a different perspective.
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⢠So, limit your use of indicators to 2
or 3 max (preferably 2).
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⢠Do not try to filter out all losing trades
with the use of indicators.
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Youâll end up filtering out the good trades
as well.
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⢠Donât just add a new indicator after
a loss because losses will occur even if you
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use 100 indicators.
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⢠Let indicators confirm your trade bias
and donât follow them blindly
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Now, here are several combinations of indicators
that you could use:
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1.
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One trend indicator and one momentum indicator
You could use a moving average to determine
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the trend, and the stochastic for example
for confirmation or as an entry point.
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If you watched my stochastic video, you already
know that I like to use the 200 EMA to identify
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the trend, and I use stochastic to find divergences
in the direction of the primary trend.
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When the price is above the 200 EMA, I plan
to take long trades, when the stochastic show
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a divergence, and when the price is below
the 200 EMA, I take short trades based on
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the same divergences offered by the stochastic.
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2.
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You could use a volume indicator and a trend
indicator
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I prefer to use the OBV in combination with
the moving average.
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My personal preference is to add a long-term
moving average on the on-balance-volume.
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This helps me to determine the direction of
the trend â as this crossover offers an
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excellent outlook on the prevailing trend
on the market.
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When the OBV is above the moving average,
i search for long positions, in the direction
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of the main trend.
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When OBV is below the moving average, I take
only short positions.
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3.
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A volatility indicator and a momentum indicator
is also a good fit.
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I like to use the Bollinger bands and the
RSI indicator, to search for divergences when
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the Bollinger bands are flat.
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You can use any other indicators.
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What type of indicator you decide to use to
develop a strategy depends on what type of
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strategy you intend to develop.
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This relates to your trading style and risk
tolerance.
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If you seeks long-term moves with large profits,
then you might focus on a trend-following
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strategy, and, therefore, utilize a trend-following
indicator such as a moving average.
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If youâre interested in small moves with
frequent small gains, you might be more interested
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in a strategy based on volatility.
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Again, different types of indicators may be
used for confirmation.
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Traders often talk about the Holy Grail â the
one trading secret that will lead to instant
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profits.
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Unfortunately, there is no perfect strategy
that will guarantee success for each investor.
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Each trader has a unique style, temperament,
risk tolerance and personality.
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As such, it is up to each trader to learn
about the variety of technical analysis tools
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that are available, research how they perform
according to their individual needs and develop
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strategies based on the results.
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If you got any value from this and learned
something new, donât forget to subscribe,
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hit the bell icon to enable notification and
leave us a like to show your support.
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Until next time.
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