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The golden secret of combining indicators
How to combine technical indicators? Knowing when to use what indicator and what is the best combination of technical indicators can help a lot in your daily trading. In previous articles, we have taught the types of main indicators and strategies for their use. Learning each of these indicators and working with them in combination can lead you to a suitable trading strategy that is capable of finding more likely opportunities. In this article, we are going to understand how we can get the best result by combining different indicators. Stay with us.
Which indicator should we use?
All these indicators show the change or stability of the price, but the angle of view of each one is different. Looking at the market from different angles can help you have a more realistic and correct perspective. Knowing these categories and how to combine the best indicators effectively can lead to better trading decisions. The thing you should keep in mind is that although all technical indicators are useful, each has its weaknesses; Therefore, the wrong combination of indicators can lead to confusion, price misinterpretations and wrong trading decisions.
Common mistakes of traders
In the following, we will examine two of the most important mistakes of traders in relation to indicator selection.
Using indicators of a category
The biggest problem of traders is that they use different indicators that belong to the same category and as a result get the same information.
In the chart, you can see 3 momentum indicators (MACDI, RSI and Stochastic). Basically, these three indicators provide the same information because all three of them check the acceleration of movement or momentum in price behavior.
As you can see, all three indicators have risen and fallen at a certain time, they have converged and all three have flattened in the period without momentum. So if you are trading with a multi-indicator strategy that uses RSI, MACD and Stochastic indicators, you are actually using only one category of indicators. These momentum indicators all show the same information.
Only trend indicators should be used
For example, you see a chart that uses three parabolic SAR trend indicators, moving averages, and Keltner channels. In this case, the purpose of all these indicators is the same, that is, to determine the direction of the trend.
You can see that in a trend all the indicators show almost the same thing.
Simultaneously, in ranges they all provide inappropriate signals. So it is a mistake to use indicators of the same category because they provide similar information and you may attach too much importance to the information obtained from the indicators and simply ignore other important points.
You may take two trend indicators and think the trend is stronger than it is because both indicators have shown a green light, possibly ignoring other signals on the chart.
The main problem with using the wrong indicators is that you may judge the trading signals to be stronger than they are by seeing the same position and direction of the indicators; And this is completely wrong.
The solution to the problems caused by using indicators of the same category is very simple: avoid indicators that provide the same information. The best strategy is to combine indicators that show different information.
Use of multiple indicators
The next common mistake is to use multiple indicators. You might see an indicator somewhere and decide to give it a try. Look at the chart and find suitable entry points. The only problem is that there is an empty space. The existence of other indicators can help you avoid wrong decisions. So, to solve this problem, you add and try other indicators. You find entry points again and this time you get better results. That’s why you keep adding more indicators and filters to the point where the chart goes out of the normal state and confuses you more. In this case, some indicators show the short position signal while others announce the long position; And when the signals become one, it is too late to enter.
The worst thing is when you start with a good strategy and then completely change it. I have had the same problem. We all make these mistakes.
No need to clutter your charts.
You may believe that each indicator on the chart has a specific role and purpose and you cannot trade without using all of them. So, if your trading results are not good, leave some of these indicators aside. With this, your mind will become more active and you will analyze the price with a different perspective.
Important points to remember:
Limit the indicators you use to preferably two to three at most.
Do not try to filter all losing trades with indicators. By doing this, you will also lose the right signals.
Do not add a new indicator after you have lost a trade, because even if you use 100 indicators, there is still a possibility of loss.
of indicators to confirm their decisions Use them and don’t use them blindly.
What indicators to choose?
Now we mention some suitable combinations of indicators:
Trend indicator + momentum indicator
The first offer includes a trend indicator and a momentum indicator. You can use moving averages to determine trends and stochastics, for example, to confirm or determine entry points. If you have seen the Stochastic indicator tutorial video, you know that I use the 200-period EMA to determine the trend and stochastic to find divergences in the direction of the main trend.
When the price is above the 200 EMA, I make long trades and when the stochastic shows a divergence and the price is below the 200 EMA, I make short trades based on the stochastic divergences.
Volume indicator + trend indicator
The second suggested method is to use a volume indicator and a trend indicator. I prefer OBV next to moving average. My preference is to apply a long-term moving average over the OBV. This helps me determine the direction of the trend as the intersection of the two gives me a good view of the market trend.
I only use short positions when the OBV is below the moving average.
Momentum indicator + swing indicator
Another suggested method for combining indicators is to use a momentum indicator and a swing indicator.
I use Bollinger Bands and RSI when Bollinger Bands are flat to find divergences.
You can use other indicators as well. The type of indicator used depends on the type of strategy you want. It has to do with people’s trading style and risk tolerance:
If you are looking for long-term movements with high profits, you should focus on trend-following strategies and use trend indicators such as moving averages.
If you are interested in small moves with small consecutive profits, rely on a strategy based on volatility. So different types of indicators are used to verify the strategy.
