In today’s episode, you’ll discover how to combine trading indicators like a pro.
So tune in right now…
Hey, hey, what’s up my friend? In today’s episode, I want to share with you how to combine trading indicators like a pro.
Here’s the thing, when new traders get started in trading, one of the first things they look for is indicators. moving average, MACD, RSI. Then they’ll wait for all these indicators to align, thinking that the more indicators align, the higher the probability of the trading setup.
But that couldn’t be further from the truth. Why is that? Well, I’ll explain more in today’s episode. But firstly, you must…
1. Understand the purpose behind using indicators
Based on my trading experience, most indicators can be used for one of these four categories:
- To identify market conditions whether the market is in a range or a trend, whether it’s in a low volatility environment, etc.
- To serve as an entry trigger to enter a trade provided the other market conditions are met.
- To signal to you when to exit a trade depending on whether you want to be riding a trend or whether you want to capture a swing in the market.
- To identify areas of value on your chart especially when the market is trending. For example, in a healthy trend, the 50-period moving average is a very useful tool to identify areas of value.
These are the four main categories of what the indicators can be used for and you must understand this. Once you understand this, then the second thing is to understand how to use your indicators.
2. Understand what each indicator is about
Yes, most indicators can serve one of those four purposes, but some indicators can serve all of these four purposes while some of these indicators can only meet one or two of these purposes. Let me explain.
For example, the Fibonacci extension is an indicator that can be used to help you exit your trade, especially in trending markets there’s a series of higher highs and higher lows.
When you are trading with the trend, as the market is going up, you might want to exit your trade before it makes a pullback, but which point of reference should you use to know when to exit before the pullback occurs?
This is where the Fibonacci extension tool can be useful. You can use the 127 extension or the 138 extension as a reference to exit your trade. This is how the Fibonacci extension tool is useful.
Average True Range indicator
On the other hand, you can also use a tool like the Average True Range indicator:
- To define the volatility of the market
- To use the information about market volatility to set better stop loss – even using it to trail your stop loss in a trending market as well
You can see that the ATR indicator serves multiple purposes. And finally…
This indicator is even more versatile, it can help meet all four of the categories that I shared earlier:
- It can help you identify the market condition, where it’s trending or ranging.
- It can help you identify an area of value. What I shared earlier is using the 50-period moving average in a healthy trend.
- It can help you serve as an exit trailing your stop loss with the hopes of riding a trend
- As for the entry trigger, something like a moving average crossover can also serve as an entry trigger.
You can see that you must understand the purpose of your indicators to see where it fits among the four categories. Some indicators meet only one or two categories. Some indicators, like the moving average, can fulfil all four categories.
It pays to understand the purpose of your indicators. Moving on…
3. Understand what you need out of your indicators
Some of you might be a price action trader and using indicators to supplement your trading. For example, you might read the naked charts to identify the current market condition, but you can use indicators to help you manage your trade and set a proper stop loss or trail your stop loss with the hopes of riding a trend.
You have to know what you need in the first place and what you want out of your indicators. Because if you do not know what you want out of your indicators, then it’s going to be a complete mess.
You’ll just pick everything and anything that comes your way in your trading and it’s pointless.
4. Use only one indicator from each category
For example, let’s say you’re using the moving average to manage your trades, to exit your trade or to trail your stop loss. That’s fine.
But don’t use moving average together with the Chandelier Kroll Stop – don’t use all these other fancy indicators to manage your trades because this is where you’re going to get conflicting signals.
Just one indicator from one category is enough. If you want to use an indicator, for example, as an entry trigger to enter your trade, then just use one indicator. Maybe use the RSI crossing above 30. Don’t use the RSI together with the stochastic indicator.
Don’t use too many indicators to time your entry because if you have too many indicators for one category, you will get conflicting signals. So pay attention to that as well.
Let’s do a quick recap…
- Know the categories of what the trading indicators can be used for: it can help define market conditions, identify areas of value, serve an entry triggers or exit your trades
- Know the purposes of your indicators out there – this means that you must understand what this indicator is about, how it works and stuff like that
- Know what you need – do you need help with defining the trend or with entering your trades
- Use not more than one trading indicator from each category – if not, you will get conflicting signals and you’ll be confused
With that said, I’ve come to the end of today’s episode. I will talk to you soon.