It is believed that indicator appeared at the same time as the mere notion of technical analysis of quotation charts. Over time their number was rising. And nowadays even in basic versions of trading terminals of forex-brokers we usually get a choice of tens of various indicators. However, any of them just indicates the likelihood of a certain course of events in future, but does not guarantee that the curve of the chart will move exactly to the side, pointed at by the indicator. It’s a different matter if we look at two or three indicators at the same time. Then chances of making a correct prediction get much higher. How to use several indicators at the same time has been explained by the broker company YA-HI.com.
What Kinds of Indicators are There?
In order to grasp the method of prediction via combination of indicators, first of all, it is necessary to understand what types they are divided into. According to experts of YA-HI.com, if you try to combine indicators of the same type, which work by the same principle, using the same output data, you are unlikely to achieve the desired result. On the contrary, it is necessary to look at indicators of different types. When their readings coincide, you can think about opening a profitable position.
So, there distinguish two main types of indicators: of time and trend. Consequently, the first ones point at the right moment of entering the market, and the second ones – at direction of future movement of quotations. Indicators of time choice are also called oscillators; indicators of trend – trend ones.
The most popular indicators at Forex are considered the following: MACD, based on three moving averages (but the chart depicts only two lines), Ichimoku (five lines), RSI (defines strength of trend and indicates probable reversal points), ADX (indicator of direction), etc.
Indicators can also be divided into a bigger number of groups: of level, trend, trend reversal, figures, divergence, advance, channel, volatility, etc. According another classification, besides trend indicators and oscillators, there also distinguish psychological indicators, which define the moment when most traders will not buy or sell any more. Psychological indicators are connected with news background, often resting on analysts’ opinion.
SEFC-Bull-Bea is considered the most popular indicator of this type.
It should be kept in mind that trend indicators do not only show direction of general movement, but also rather effectively define the moment of starting reversal. However, they should not be used for taking decisions on short positions, furthermore – on scalping. They simply “fail to notice” any “noises”, small bounces, and pullbacks. Popular trend indicators at Forex include: Moving Average, Bollinger Bands, Average Directional Movement Index, etc.
On the other hand, oscillators are not bad at defining near-term perspective of quotations movement. Particularly, owing to them one can see slowdown or turning point of a trend, formation of consolidation and flat, as well as a way out from flat market. The experts explain that oscillators sooner than trend indicators point at trend reversal, but their accuracy for long positions is relatively small. Popular oscillators include Stochastic Oscillator, Relative Strength Index, Force Index, etc. (Also read the article “Company YA-HI.com Tells How to Make Money from GAPs” – editor)
How to Combine Indicators?
Certainly, you have already come to a rather logical conclusion that the more indicators you use for technical analysis the more precise your forecast is. However, you should not try to look at all of them at once. First of all, it will take too much time. Secondly, readings of indicators often contradict one another. And if you start “listening” to all at once, you will never take a correct decision.
A trader simply needs to choose two-three most precise (in his/her opinion) indicators of different types, set them on his/her trading terminal, and make good deals. However, before choosing indicators it is necessary to study how they work and how they are calculated. Such information is always available in the Internet. For a start, you can use most popular ones, offered in a standard package of a trading terminal.
As a rule, indicators are calculated on the basis of time periods (opening, closing of a candlestick, etc.). Therefore, besides combination of, for example, a trend indicator and an oscillator, it is worth looking at what they indicate, let us say, on a four-hour, daily, and weekly chart. This should save you from taking hasty decisions. Experts also remind about limiting losses by setting stop loss. After all, it is not worth to trust indicators too much. For example, a trend indicator and an oscillator may uniquely signal about the unprecedented strength of a trend, but suddenly there is unexpected news, and…
Warnings are many here. However, practice shows that competent use of indicators leads to considerable increase of one’s profitability not only at Forex, but also at any stock exchange. At the same time, use of only one indicator (unlike combination of such) has little efficiency.
Thus, any trend indicators merely show how quotations moved in the past and on the basis of this information point at presence (absence) of a trend, as well as its strength. If a trend is ready to reversal, and there comes the moment when the market becomes overbought or oversold, this will be easier to see with the help of an oscillator (it starts to contradict a trend indicator). A trend indicator will also show this situation, but later; probably, when good time for entering the market will already be lost.
Another rule, recommended by experts of YA-HI.com: do not complicate life. Use only those indicators that are clear to you. You do not need two trend indicators, three oscillators, and yet a psychological one at the same time. One indicator of each type or two first ones is enough to gain self-confidence and effect correct actions at the market.
The Internet offers loads of example strategies, based on combination of indicators. You should only understand that every strategy has been made by a trader for him/herself. So, you’d better find your own way. Watch carefully how readings of indicators transform in real movement of quotations. Before starting to use the method of combination, try it out on a demo-account of the same broker, where you are going to trade. Studying someone else's strategies, getting acquainted with experience of professional traders will also be useful.
