If you have been trading for quite a while, you must already know that understanding and analysing the forex market is important for gaining profit. And one of the essential tools for this is using trading indicators. But depending on just one indicator is not always the best idea as the forex market is fast and unpredictable. Thus, using different indicators together can help you confirm the signals with accuracy. Not only this, but it will also help in reducing the false alarms.
Now the question is how do you combine them effectively without overcrowding your charts?
Let’s learn it in the blog below.
Combining different trading indicators
Ok, we all must agree to the fact that no single indicator is perfect when it comes to online currency trading.
Every one of them has their strengths and weaknesses. Thus, combining multiple of them can help you move out of the noise and increases the reliability of your trade signals.
How to do this?
You should combine any indicator?
The answer is a No! The best practice is to combine only those indicators that complement each other, instead of the ones that show the same thing to you.
After all, what is the fun of looking at the same thing on different indicators?
Types of Indicators to Combine:
If you want to build a strong trading strategy, you should mix these:
1. Trend Indicators: These are the indicators that help to check and predict the direction of the market. Common trend indicators are Moving Averages (SMA, EMA), Bollinger Bands, and Parabolic SAR.
2. Momentum Indicators: This type of indicator shows the strength of the movement of the price. Some of the examples of momentum indicators are Relative Strength Index (RSI), the Stochastic Oscillator, and MACD (Moving Average Convergence Divergence).
3. Volatility Indicators: These indicators help the traders to measure the price fluctuations. The common examples include Average True Range (ATR) and Bollinger Bands.
4. Volume Indicators: These indicators help the traders to confirm the strength of a trend. Some of the popular examples of volume indicators are On-Balance Volume (OBV) and Chaikin Money Flow (CMF).
How to Combine Trading Indicators Effectively?
Now, the major question, i.e., how to combine best forex trading indicators to get the best results? Here is how-
1. Use one indicator per category:
Ok! You might think that you should combine all indicators you know. That’s a common forex trading psychology.
Wait! You should not. Always avoid using too many as with this, you will end up cluttering your charts with multiple indicators from the same category.
Understand this with an example. Consider you are using both RSI and Stochastic Oscillator. If so, it might be no longer useful to you, as both of them measure momentum. In this scenario, you can pair one trend indicator, one momentum indicator, and one volume or volatility indicator.
2. Look for confirmation instead of duplication:
If different indicators are giving you the same signal, it will add strength to your trade decision.
For example, if you are using Moving Averages and it shows an uptrend, meaning RSI is above 50, then, it confirms bullish momentum. Additionally, if OBV is rising, indicating strong buying pressure, then it’s a higher probability trade.
Isn’t it good?
3. Avoid overcomplicating your strategy:
If you think many indicators mean better results, then it is not always correct.
Thus, it is always advised to stick to 2-3 indicators that work well together. This will keep your analysis simple and effective. Too many signals can create confusion and indecision.
4. Back test your strategy:
It is always a good idea to use and test your indicator on historical data to see how well it performs in different market conditions, before you use it on live trading.
5. Adjust for market conditions:
Remember, not every indicator works well in all market types. Thus, you need to change your strategy and the choice of strategy according to the markets and the assets you are trading.
Here is a list of the indicators that should be used together:
1. Trending markets: Use moving averages + MACD
2. Range-bound markets: Use RSI + Bollinger Bands
3. High volatility: Use ATR + Volume indicators
Here is an example of a simple indicator combination:
Consider if you are a forex trader and you want to build an effective trading strategy. You could use EMA (50 & 200) for trend direction, RSI for momentum confirmation, and OBV for volume validation. Now if the 50 EMA crosses above the 200 EMA (bullish signal), RSI is above 50 (confirming momentum), and OBV is rising (showing strong buying pressure), it is simple, you’ve got a strong buy setup!
What say?
Conclusion
To conclude, by combining different trading indicators, you can improve your accuracy to a significant level. The key is to choose wisely and keep it simple. But this is not that easy. You should always use those indicators that complement each other. Also, you must look for confirmation, and always back test your strategy before going live.
