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How Many Indicators Should You Use In Trading

Last Updated: March 20, 2022

By Rayner Teo

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In today’s episode, you’ll discover the ideal number of trading indicators you should be using.

So tune in right now…

Resources

The Complete Guide to Donchian Channel Indicator

Why You Lose Money with Trading Indicators

Transcript

Hey, hey what’s up my friend? In today’s episode, I want to talk about how many indicators you should use in your trading.

A mistake that I see many traders make, myself included, is that in my early years of trading I have at least 4 indicators on my chart I have indicators like the stochastic the RSI, the CCI etc. on my charts and I would wait for all these indicators to point in the same direction before I enter the trade.

For example, I will look for the stochastic to be oversold, RSI to be oversold, CCI to be oversold and then I would enter the market thinking the market is about to reverse higher because many indicators are pointing that the market is oversold.

But that couldn’t be further from the truth. If you realized, those indicators belong to the category called oscillators, so they have a similar mathematical formula. The RSI, the stochastic, the CCI have similar mathematical formula behind them.

When one goes up, the other indicators will point up at the same time. Clearly having more indicators on my chart doesn’t increase the probability of the trade working out, in fact, it’s quite silly, actually.

So the question is how many indicators should I use then? Should I just use one indicator since there might be duplicates? That’s what we will tackle in today’s episode.

First and foremost, let’s take a step back and think about the purpose of an indicator. In my opinion, an indicator can be used for 4 main categories.

1. An indicator can be used to help you define the trend

For example, you can use a 200-day moving average, to help you define the long-term trend. If the price is above the 200-day moving average, the long-term trend is up. If the price is below the 200-day moving average, the long-term trend is down.

That’s the first purpose, defining the trend.

You can use indicators like moving average, to identify the area of value in a trending market. These are the second category, that is defining your area of value.

It can also serve as an entry trigger to get into a trade. An entry trigger could be something as simple as the stochastic crossing above 20, to be a trigger to buy.

I’m not saying you should buy blindly when stochastic goes above 20, but if all other conditions are met, stochastics has crossed above 20, and you can say that since bullish momentum is coming to market then it is a trigger to buy.

But more often, people use candlestick patterns as an entry trigger like a bullish hammer, a bearish engulfing better, etc. That is what I mean by entry trigger.

This is where indicators shine. You can use indicators like let’s say the parabolic SAR to trail your stop loss, you can use the Donchian Channel to trail your stop loss, you can use the average true range indicator to help you set your initial stop loss.

How many indicators do you need

Now the question is, “How many indicators should I use?” Well, that depends on what you need. Do you need a tool to help you define the trend? Do you need an indicator to help time your entry? Do you need an indicator to help you manage your trade?

Once you have answered those questions, then you’ll have to find the appropriate indicators to use.

For example, let’s say you’re an indicator junkie, you want to use indicators to help enter, exit, and manage your trades. Then I would say you can use 4 indicators:

1. To define the trend
2. To define your area of value
3. To serve as an entry trigger

Or maybe you’re familiar with price action trading, you can define the trend using price action, you can identify your area of value using support resistance, or trendlines, so you don’t need indicators.

Or maybe you can also use price action to help you time your entry using candlestick patterns, then at this point maybe the only indicator that you need is for trade management, maybe you can use an indicator like a moving average, etc.

There’s only one indicator that you need. Can you see where I’m coming from? There is no best combination of indicators that you must be using because it all depends on your needs as a trader.

Think about these 4 categories that I’ve just shared with you and what the indicators can be used for: