Best Combination of Technical Indicators โ Market Maker Methods
Knowing what indicators to use and what the best combination of technical indicators is can dramatically improve your chart reading skills. If you use the wrong technical indicators, this can lead to inaccurate price interpretation and subsequently to bad trading decisions.
Our team at Trading Strategy Guides has meticulously hand-picked every technical indicator so it can give us the best performance for each individual trading strategy that weโve created. Also, read our best ADX Strategy.
However, if you are a price action trader that only uses naked charts you can safely check out our ultimate chart pattern step-by-step guide.
Technical indicators make it easy for you to identify current price trends and predict where prices will move in the future. By developing effective technical analysis strategies, you can increase the amount you earn each trading day.
However, while all technical indicators are useful, they each have their own set of weaknesses. If you only use a single indicator to monitor the market, there may be certain price trends (or hazards) that you arenโt noticing.
By combining multiple technical indicators into a single trading strategy, you can limit your risk while still earning strong returns. Below, we will explain how to create the Best Combination of Technical Indicators.
A multi-indicator strategy should avoid being redundant and should use the best combination of trading indicators in a meaningful way. We also have training on the Average True Range Indicator.
A multi-indicator strategy has the danger to become redundant because many times traders use indicators that show the same type of information. To avoid being trapped by this trading fallacy you need to understand that technical indicators can be classified into three groups, as follows:
- Trend Following Indicators allow you to determine whether an asset is currently overbought or oversold. Many trend following indicators, such as Bollinger Bands, attempt to create a clear โchannelโ. A clear channel will tell you whether prices are close to breaking out or returning to normal.
- Momentum Indicators, such as the Relative Strength Index (RSI), allow you to determine the direction and strength of a current price trend. As an asset begins to build momentum, opening a new position will become less risky. Looking at Moving Average indicators also help you gauge momentum.
- Volume Indicators help traders identify the (strong) relationship between price and volume. Increases in trading volume almost always result in an increase in price. However, these events do not always occur at the same time, which is why volume indicators are good for advanced forecasting. The On Balance Volume (OBV) and Money Flow are two of the most useful volume indicators.
As you can see, while these categories of indicators are trying to determine the same thingโwhether prices are about to increase, decrease, or remain stableโthe angle they each offer is unique. Looking at the market from multiple different angles can help you develop a more accurate, realistic, and actionable perspective.
Essentially, if you trade with a multi-indicator strategy that uses the RSI indicator, MACD indicator and the stochastic indicator you are basically using 3 types of technical indicators that belong in the same category.
These are all momentum indicators that are going to display for you the same kind of information in one way or the other. In the above figure, you can notice how all indicators follow each other simultaneously.
This is not good!
The problem with using unfitting technical indicators is that you might actually think the trade signals are stronger if all indicators point in the same direction.
The fix to the overemphasizing information from using indicators that belong to the same group is quite simple. Avoid using technical indicators that display the same kind of information. The best strategy multiple indicators combine indicators that show a different type of information.
Best Strategy Multiple Indicators
Now comes the fun part.
Moving forward, weโre going to highlight what indicators to use for the best strategy multiple indicators.
Weโre going to use a momentum indicator, trend-following indicator and a volume indicator that support and complement each other.
RSI Momentum Indicator
We wonโt spend any time explaining how the RSI is plotted because we live in the computer age and they do the work automatically for us.
The Relative Strength Index is a momentum indicator and a leading indicator at the same time. A lot of traders like the RSI indicator because itโs easy to use.
We use the RSI indicator to identify possible overbought and oversold conditions in the market.
Next, weโre going to mention our second indicator.
See below โฆ
OBV โ Volume Indicator
The second indicator used for our strategy is the OBV indicator.
The OBV indicator is based on the idea that both the volume and the price activity are equally important. In this regard, the OBV combines both price and volume to show you the total amount of funds going in and out of the market.
The screenshot above shows how your chart setup should look if you followed the above instructions.
The main idea behind the On Balance Volume indicator is that the market price will follow where the volume flow is going.
Now, all weโve got to do is to name our last technical indicator that will complete the multi indicator strategy.
Ichimoku Kinko Hyo (Ichimoku Cloud)
The Ichimoku Cloud is another popularย trend indicator. Ichimoku Kinko Hyo will plot several different lines on a chart that make it easy to identify future instances of strong support or resistance.
On the indicatorโs chart, there will be a blue line (Kijun Sen), a red line (Tenkan Sen), a green line (Chikou Span), and a red/green band involved (Senou Span). In order to get an accurate movement reading, each of these lines will need to be accounted for.
The blue line (the base line) will plot the average of the highest high and the lowest low over the past 26 trading periods. Similarly, the red line (the turning line) will plot the average of the highest high and the lowest low over the past nine trading periods.
The lagging green line will plot the closing price 26 periods in the past.ย This will help provide you with a better perspective on monitoring trends.ย
- The first band will be calculated by averaging the blue and red lines together.
- The second band will be calculated by averaging the highest high and the lowest low over the past 52 trading periods.ย
The last step is to take the trend line and shift it 26 periods ahead. Once all of these lines are plotted together, you will have a wide-reaching view of the market. From here you will be able to decide whether there is a trend strong enough to justify opening a new position.
Bollinger Bands โ Trend Following Indicator
Bollinger bands is the best trend following indicator that measures the volatility of any given market. Itโs also the third indicator of our best strategy multiple indicators.
Buying and selling based on the Bollinger bands can be a very effective trading strategy especially if used in combination with other technical indicators.
Finally, your chart setup should look similar to the above chart.
Without further ado, letโs see how you can efficiently trade using multiple technical indicators and how to make consistent profits the smart way.
Multi Indicator Strategy
For our strategy, you will need to use three to four technical indicators in order to successfully trade. These indicators include the Relative Strength Index, the Ichimoku Cloud, Bollinger Bands, and On Balance Volume. Collectively, these indicators account for the trend, momentum, and volume aspects of trading that all traders should pay close attention to.
Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules of the trading strategy. For this article, weโre going to look at the buy side.
Note* This strategy can be used on any time frame so go ahead and apply it to your preferred time frame.
Step #1: Price needs to Break and Close above the middle Bollinger Band
The first step is quite easy!
Actually, the whole strategy is so easy to understand that youโll be able to trade it right away.
So the first trade confirmation we need is for the price to break and close above the middle Bollinger band. Once this trade condition is verified, we can check the other indicators for adding more confluence to our trade signal.
Now, letโs see what the RSI indicator has to say about the price action.
See below โฆ
Step #2: Wait for the RSI indicator to trade above the 50 level if it doesnโt already
Everything we do at Trading Strategy Guides is logical! We always try to make sense of how to correctly interpret the action of any given technical indicator.
During this step, we seek to find an agreement between what the Bollinger Bends is saying and the RSI own price reading. So, the breakout can be confirmed if the momentum is behind the move.
Usually, an RSI reading above the 50 level is considered as a positive momentum while an RSI reading below the 50 level is considered negative momentum.
Note* Not all the time youโll see the RSI breaking above the 50 level at the same time as price breaks above the middle BB. Sometimes, we need to wait longer for the bullish momentum to show up.
Step #3: Wait for the OBV indicator to rise. Buy at the market once you see volume confirming the price.
The last trade condition before pulling the trigger is again easy to understand. We want to trade on the side with the smart money. In this regard, we look for evidence that the trade we want to take as real buying power behind it.
We can notice that the real volume only showed up later. Itโs important to have patience and wait for the exact trade conditions to be satisfied before getting into a long trade.
The next important thing we need to establish for our scalping strategy is where to place our protective stop loss.
See below โฆ
Step #4: Hide your Protective Stop Loss below the lower Bollinger Band
Knowing where to place your protective stop loss is as important as knowing when to enter the market.
The logical place to hide your protective stop loss is below the lower Bollinger band. A break below the lower BB will invalidate our trade idea, and we want to minimize our losses.
Last but not least, we also need to define a take profit level for our multiple indicator strategy which brings us to the last step.
See below โฆ
Step #5: Take Profit when the price breaks below the lower BB
Our take profit strategy only looks at one indicator to signal us a possible exit zone. If we wait for confirmation from multiple indicators then we might as well give back some of our profits.
In this regard, the best way to take profits is when we see the price reversing. A break below the lower Bollinger Band is a good signal for a possible reversal, so we want to cash out our profits.
Note** the above was an example of a BUY trade using multiple technical indicators. Use the same rules for a SELL trade โ but in reverse. In the figure below, you can see an actual SELL trade example.
Conclusion
You have to take the necessary time and learn the meaning of each technical indicator. No indicator will give you 100% win rates so donโt be the one chasing fairy tails. In the $6 trillion Forex market, no one can ever predict the market with exact certainty. Here is how to apply technical analysis step by step.
However, if you follow our best combination of technical indicators you can improve your chances of winning more often than losing trading the market. You have to keep in mind that all indicators are based on the past price so only a multi indicator strategy can help you predict the future.
Thank you for reading!
Please leave a comment below if you have any questions about the Best Combination of Technical Indicators!
Also, please give this strategy a 5 star if you enjoyed it!
[ratings]
Please Share this Trading Strategy Below and keep it for your own personal use! Thanks Traders!
In one of the step, it mentions scalping (โThe next important thing we need to establish for our scalping strategy is where to place our protective stop lossโ). Would you suggest the same 3-4 indicators if for swing or day trading ?
Thank you !
Great article. Confirmed what I was thinking. What period should be used for the RSI?
Excellent question Sandi !
I am new at fairly new at trading and my BIGGEST question is always, โWhat time period(s)โ do I use to get the best information for a โbuyโ or โno buyโ.
Waoh. What a wonderful strategy. Thumbs up to you guys.
Why were the Ichimoku clouds mentioned but then not even used in the strategy?
On my mind aswell Cody
The real awesome forex indicator combination I have ever seen, very systematic and clearly explained.
It is realy a great job
Thanks so much for this wonderful piece on multiple indicators.
I now understand trading with them better.
Kindly send me the MT4 SETUP DETAILS for ON BALANCE VOLUME and BOLLINGER BANDS.
Thanks
Ample in simple crisp and confined manner .Great
Does this applies also for stocks trading, or itโs a strategy only for forex?
hi.. the same question.. does this indy applicable when you do stock trading??
Thanks, so I do not understand why you mentioned Ichimoku in the strategy? I am waiting for your response.
It will plot several different lines on a chart that make it easy to identify future instances of strong support or resistance.