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How To Combine The Best Indicators And Avoid Wrong Signals

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How To Combine The Best Indicators And Avoid Wrong Signals

When it comes to indicators, we can devide them into three classes:

  • momentum indicators
  • trend-following indicators
  • volatility indicators

Knowing which one belongs to which category, and how to combine the best indicators in a meaningful way can help you make much better trading decisions. On the other hand, combining indicators in a wrong way can lead to a lot of confusion, wrong price interpretation and, subsequently, to wrong trading decisions. Not good!

Indicator redundancy – duplicate signals

Indicator redundancy means that a trader uses different indicators which belong to the same indicator class and then show the same information on a traders charts.

The screenshot below shows a chart with 3 momentum indicators (MACD, RSI and the Stochastic). Essentially, all 3 indicators provide the same information because they examine momentum in price behavior.

You can see that all indicators rise and fall simultaneously, turn together and also are flat during no-momentum periods (red boxes).

The next screenshot shows a chart with 2 trend indicators (the ADX and the Bollinger Bands). Again, the purpose of both indicators is the same: identifying trend strength.

You can see that during a trend, the Bollinger Bands move down and price moves close to the outer Bands. At the same time, the ADX is high and rising which also confirms a trend.

During a range, the Bollinger Bands narrow and move sideways and price just hovers around the center. The ADX is flat or going down during ranges giving the same signal.

Overemphasizing information fooling yourself

The problem with indicator redundancy is that when a trader picks multiple indicators which show the same information, he ends up giving too much weight to the information provided by the indicators and he can easily miss other things.

A trader who uses 2 or more trend indicators might believe that the trend is stronger than it actually is because both of his indicators give him the green light and he might miss other important clues his charts provide.

Indicator categories

The following table arranges the most commonly used indicators by categories. Now, you can avoid using indicators that are from the same category and combine indicators from different categories that complement each other.

Momentum

Trend

Volatility

Chart studies

Stacking the odds – combining the best indicators in a meaningful way

Now comes the interesting part.

The screenshot below shows a chart with three different indicators that support and complement each other. The RSI measures and identifies momentum plays, the ADX finds trends and the Bollinger Bands measure volatility. Note here that we do not use the Bollinger Bands as trend indicator but just for volatility.

We will go through points 1 to 5 together to see how the indicators complement each other and how choosing an indicator for each category helps you understand price much better.

Point 1: Prior to point 1, the ADX shows an ongoing trend and the RSI confirms the rising momentum. During that trend, support and resistance broke as long as the ADX kept above 30 and rising.

Point 2: The ADX has turned and shows losing (bullish) trend strength – an indication that the support level might not break. Price did not make it past the Bollinger Bands and bounced off the outer Band.

Point 3: At point 3, price is in a range and the ADX loses its validity – an ADX below 30 confirms range-environment. In a range, the RSI indicator can help identify turning points together with the Bollinger Bands.

Point 4: The same holds true for point 4 – the ADX is still below 30. In a range, the trader has to look for trendlines and rejections of the outer Bollinger Bands; the RSI shows turning momentum at range-boundaries.

Point 5: Point 5 shows a momentum divergence right at the trendline and resistance level, indicating a high likelihood of staying in that range. Again, price could not get outside the Bollinger Bands and the ADX is flat.

Example #2

The next chart shows that by combining a RSI with Bollinger Bands, you can get complimentary information as well.

The RSI provides momentum information: a low and falling RSI shows increasing downside momentum; an RSI around 50 signals a lack of momentum; a high and rising RSI shows strong bullish momentum.

The Bollinger Bands not only provide volatility information, but they also provide trend information: price between the middle and outer Bands shows a trending phase; price breaking the middle Band shows a potential reversal; and when price doesn’t reach the outer Band anymore, it shows fading trend support.

More is not always better – the right combination of tools is what matters

The perfect combination of indicators is not the one that always points into the same direction, but the one that shows complimentary information. Knowing which indicator to use under which circumstances is a very important part of trading.

Combining indicators that calculate different measurements based on the same price action, and then combining that information with your chart studies will very quickly have a positive effect on your trading.

Further reading: Indicator cheat sheet

Vertex Indicator a successful combination of indicators

Vertex Indicator is a combined oscillator that combines the readings of several indicators, which makes it possible to accurately predict the trend reversal. The Vertex MOD 3.01 alerts + arrows is composite and includes two modules, one of which is a basic oscillator. The visualization of the optimal places for entering the market is the signal arrows - the ease of interpretation of signals attracts beginners , however, experienced traders are often used by such an indicator in their systems.

Characteristics of Vertex Indicator
  • Platform: Metatrader4
  • Currency pairs: Any
  • Trading Time: Around the clock, recommended European and American sessions
  • Timeframe: Any, recommended H1 and higher
  • Recommended broker: Alpari, InstaForex
How does the Vertex Indicator work

Vertex Indicator is the result of combining three classic indicators: Momentum, Moving Averages and Bollinger Bands. These tools are in the list of free applications in MT4, and therefore known to both beginners and experienced traders.

The markup of the indicator is formed step by step:

  1. Vertex MOD 3.01 alerts + arrows calculates a modified version of Momentum, which is represented on the chart with blue and red lines.
  2. The information obtained is used to build Bollinger envelopes.

Arrows to identify the turning points on the price movement chart simplify the orientation in the market situation, providing the trader with specific signals for entry. The Vertex Indicator can be used with the default settings, so you do not need to change them during the installation, but you can adjust all important options if you want:

  • Processed data processing period for technical analysis
  • Control_Period data processing period for calculations for the construction of a moving average - this line has a blue color by default
  • Signal_Period data processing period for constructing the Momentum red signal line in the Vertex MOD 3 Indicator
  • Signal_Method method for constructing a moving average
  • BB_Up_Period/BB_Dn_Period data processing period for building Bollinger Bands - 2 values for channel formation
  • BB_Up_Deviation/BB_Dn_Deviation number of standard deviations for the first Bollinger Bands - 2 values for forming both sides of the channel

Rules of trade by the Vertex MOD 3 Indicator

BUY:

  1. The red line is below the upper Bollinger line, while its value is below the level -6. This factor is normal and is marked on the chart by an arrow pointing upwards
  2. Momentum reached a level -10, which means a strong impulse - such a strong entry point is additionally indicated by a aqua dot

SELL:

  1. The red line is above the upper Bollinger line, and its value is above level 6. This factor is normal and is marked on the chart by an arrow pointing down
  2. Momentum reached the level 10, which means a strong impulse - such a strong entry point is additionally indicated by a pink dot

It is worth noting that such an indicator signal as an arrow is often repainted, whereas an arrow with a dot is a strong signal, which is worth paying attention to.

Vertex MOD 3 indicator can become the basis for creating a profitable trading strategy, the main thing is that in addition to the indicator there were other filters for the signals. For such a system it will be necessary to select a currency pair and a timeframe on which trading strategies will work optimally.

In the archives Vertex_Mod_3.01.rar:

  • Vertex MOD 3.01 alerts + arrows.ex4
  • Vertex MOD 3.01 alerts + arrows.mq4
  • Vertex_template.tpl

Free Download Vertex MOD 3.01 alerts + arrows

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