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How To Combine Trading Indicators | Best Indicator COMBINATIONS For Winning Trading Systems - YouTube
Channel: The Secret Mindset
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Using a reliable indicator or a combination
of them can increase trading signals’ accuracy
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by multiple times.
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Now the real challenge is to combine indicators
in a smart way.
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This means that indicators should deliver
different type of information about the market
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and confirm each other rather than duplicate
signals.
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When you choose two or more indicators that
provide identical information about prices,
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it really does not help much; and while you
may call it "a signal confirmation", in reality
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it’s simply "a signal duplication".
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That is why in today’s video I will show
you how you should combine trading indicators
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and what are the best combinations you should
use.
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If you are randomly choosing indicators for
technical analysis, chances are you’ll pick
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some with similar studies.
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And how to avoid this?
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First of all, you should know what type of
indicator you use.
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There are 4 general types of indicators:
• Trend indicators
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• Volume indicators
• Momentum indicators
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• Volatility indicators
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Trend indicators reflect tendencies in price
movements: up moves, down moves and sideways
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price moves.
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In simple words, trend indicators allow to
visualize trends in the market.
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Momentum indicators record the speed of prices
moving over certain time period.
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At the same time Momentum indicators track
strength and weakness of a trend: the highest
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momentum is always registered at the beginning
of a trend, the lowest - at its end point.
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Volatility indicators show the size and the
magnitude of price fluctuations.
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In any market there are periods of high volatility
(high intensity) and low volatility (low intensity).
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These periods come in waves: low volatility
is replaced by increasing volatility, while
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after a period of high volatility comes a
period of low volatility.
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Volatility indicators measure the intensity
of price fluctuations, providing an insight
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into the market activity level.
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Volume indicators are used to determine the
interest in a market.
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High volume, especially near important market
levels, suggests a possible start of a new
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trend, while low volume suggests traders uncertainty
or no interest in a particular market.
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As a main rule, you should avoid using too
many indicators from the same category.
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There is also a simple method of identifying
similar indicators.
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By setting up your indicators on a chart,
you will be able to basically see a similar
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pattern of indicators behavior.
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If they rise and fall in almost similar intervals,
they are most likely identical in the type
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of data they provide.
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So let’s talk about the correct combinations
of indicators you should use in you analysis.
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1.
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First combination involves a trend indicator
and a momentum indicator
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This combination is very effective because
momentum indicators show the movement of price
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over time and how strong those movements are/will
be, regardless of the direction the price
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moves.
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Because momentum indicators show the relative
strength of price movements but leave out
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the directionality of the price movements,
trend indicators will help you to show price
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trends and directions.
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An effective combo would be the 200 moving
average as trend indicator and the Relative
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Strength Index for momentum.
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The 200 MA smooths the price fluctuations
(noise), to see the real picture of the market
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direction.
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The RSI displays possible shifts in momentum.
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When the market breaks the MA line upwards
and the RSI crosses the 50-line upwards, it
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may be a sign of an upward movement.
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A signal of a downward movement is when the
market crosses the MA line downwards and the
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RSI crosses its 50-line downwards.
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Or when you spot a bullish divergence on the
RSI, while the price is above the 200 MA,
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you could look for long trades and when you
find a bearish divergence on the RSI, with
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the price below the 200 MA, you search for
short trades.
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Other viable combinations are: Heiken ashi
and RSI, Ichimoku Kumo cloud and Stochastic
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or Parabolic SAR with MACD.
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2.
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Second combination involves a trend indicator
and a volume indicator
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As traders, we are more inclined to join strong
moves and take no part in moves that show
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weakness—or we may even watch for an entry
in the opposite direction of a weak move.
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An effective combination is Heiken ashi indicator
with Money Flow index, mainly for trend confirmation.
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A rising market (meaning green Heiken ashi
candles) should see rising volume, meaning
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rising Money flow index, maybe above its 50
level.
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A declining market (meaning red Heiken ashi
candles) should see decreasing volume, meaning
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decreasing Money flow index, below its 50
level.
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Another combination includes one or 2 moving
averages and the OBV.
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A rising OBV reflects positive volume pressure
that can lead to higher prices.
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Conversely, falling OBV reflects negative
volume pressure that can foreshadow lower
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prices.
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If you analyze OBV movement in the context
of an uptrend or a downtrend, you can find
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many great trades.
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You can trend trade, when the price is above
the moving average and OBV is increasing.
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You can also anticipate price reversals.
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After a long price move higher or lower, if
the price begins to range around the moving
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average with little price movement and you
spot a divergence on the OBV, this might indicate
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that a reversal is underway, and prices will
change direction.
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You can substitute the OBV with Volume oscillator
or Chaikin Money Flow.
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3.
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Third combination involves a trend indicator
and a volatility indicator
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Market volatility goes through cycles of highs
and lows.
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If you use a combination of trends and volatility,
your goal should be to watch the direction
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of market movement when there is a sharp increase
in volatility as a possible indication of
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a future market trend.
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In this regard, Heiken Ashi candles for trend
direction and Average True Range as a volatility
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measure is an effective way to take trades.
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When it comes to analyzing and measuring volatility,
the average true range indicator analyzes
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candle size and how far price has traveled
on average during a given time period.
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A high ATR reading implies that price moves
farther and a low ATR shows that price candles
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are narrowing in size.
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Used in combination with Heiken Ashi, you
can filter those trades when there isn’t
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much activity on the market.
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A moving average and Bollinger Bands also
work well together.
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Widening Bollinger Bands show, therefore,
a high volatility market environment and Bollinger
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Band that are narrow signal a contracting
and low volatility market environment.
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When the market is moving towards a Bollinger
Band, for example, you know that it will likely
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turn around.
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Similarly, when the market has broken through
the middle Bollinger Band, you know that it
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is likely to continue its movement until it
reaches the outer Bollinger Band.
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When you add the dominant trend direction
into equation, this knowledge provides a clear
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indication for how far the market will move.
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4.
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Fourth combination involves a momentum indicator
and volume indicator
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Momentum is often referred to as trend strength.
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This combination is useful because when momentum
changes, the volume gives an indication of
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how strong the move is.
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Bullish momentum moves on high volume are
more likely to be maintained than those on
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low volume.
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A good combination would be the RSI indicator
with Volume Oscillator.
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The 50 level of the RSI, as momentum indicator,
is great when it comes to identifying the
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transition point from range markets to trending
markets.
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A market in a tight range with a low momentum
that suddenly shows increasing volume into
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one direction and a rising momentum can foreshadow
the creation of a new trend.
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MACD and OBV also work well together, with
Stochastic and Money Flow Index being another
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viable combination.
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5.
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Fifth combination involves a momentum indicator
and volatility indicator
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Volatility and momentum are two fundamentally
different concepts in trading.
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It is essential to understand the differences
between volatility and momentum to make correct
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trading decisions and to fully understand
price movements.
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In this regard, by using RSI in combination
with Bollinger Bands, you can confirm when
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the market is turning and pick a great entry
point.
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When the two indicators are combined, RSI
acts to support possible price trends.
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For example, if price reaches the upper band
of a Bollinger Band price channel and, at
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the same time, the RSI reads above 70, the
trader could read that the asset is overbought.
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Another approach would be to take signals
when price crosses though the middle Bollinger
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Band, and at the same time, the RSI is moving
up and crossing its 50 line.
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Keltner Channel as volatility indicator and
MACD for momentum readings is another effective
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combination.
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6.
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Sixth combination involves a volatility indicator
and volume indicator
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This combo can be extremely valuable in making
timely trading decisions, as well as analyzing
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the market in general.
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A viable combo would be Bollinger Bands with
OBV, and search for divergences near the outer
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bands.
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If the OBV makes a lower high when the price
makes a higher high, and is near the upper
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Bollinger Band, there’s a classical bearish
divergence — indicating that only the retail
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traders are buying.
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Keltner channel as volatility indicator with
Volume Oscillator is another effective way
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to trade.
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A simple strategy is to buy if the price breaks
above the upper band, if the breakout is confirmed
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by the volume indicator, and to sell when
the price breaks below the lower band, also
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confirmed by volume.
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While the combinations of indicators presented
in this video work, you may find some of them
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are easier to use than others.
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Your main job is to find out what indicators
you prefer and you understand because the
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best indicator combination depends on the
type of trading strategy you want to implement.
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A universal rule that applies to all trading
styles is that you should strive for simplicity
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and not clutter your trading workspace with
countless trading indicators.
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Don’t overdo it with too many indicators
because you’ll run the risk of getting confused
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in numbers that might not even be relevant
to your trading strategy, which inevitably
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will have a negative impact on your trading
performance.
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Until next time.
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