Aug 13, 2020
Types of Indicators and How to Combine Them
In this article, we will aim to identify the 4 main types of indicators and how effectively combine and use them. First, let’s start with 5 different types of technical analysis indicators.
There are 4 types of indicators;
1- Trend Indicators
2- Momentum Indicators
3- Volatility Indicators
4- Volume Indicators
Alongside with these 4 main types, all indicators are also labeled as either lagging or leading indicators. Basically, lagging indicators are the indicators that provide you a useful insight only after an event has happened. They are mostly used for confirming a price action after it has happened. However, leading indicators are the opposite of lagging indicators. They aim to predict what’s going to happen next and provide you a signal with that assumption. Therefore, usually lagging indicators are more accurate than leading indicators. Now that’s out of the way, let’s look at each type of indicators.
Trend Indicators
Trend indicators as they are named aim to look and identify an existing trend. The goal here is to detect when a trend is forming, see if the trend is still intact and to see if there is a potential trend change incoming. The most common trend indicators are moving averages and MACD. However, of course we will dive deeper into different indicators and will give you a full list of Trend indicators
· TRIX Indicator
· Parabolic SAR
· Smoothed Rate of Change
· Two Moving Averages
· ADX
· CCI (Commodity Channel Index)
· DPO (Detrended Price Oscillator)
In the future articles, we will dedicate a post into all these mentioned indicators and how they exactly work while providing back test data.
Momentum Indicators
Momentum Indicators look for an existing trend and then further tells you how strong is the momentum of the trend in mention. Momentum and Trend Indicators will perform poorly during a sideways market as there is no clear trend therefore, no momentum. However, they will perform exceptionally when the markets are trending and moving.
· Aroon
· MFI (Money Flow Index)
· ROC (Rate of Change)
· RSI (Relative Strength Index)
· STOCH
· William’s %R
In the future articles, we will dedicate a post into all these mentioned indicators and how they exactly work while providing back test data.
Volatility Indicators
Volatility indicators look at the current and past market volatility as well as actually provide some decent entry points. The goal here is to predict when the volatility will occur. Though, it will not tell you which way the volatility will come. Therefore, it is the best to use a strategy that consists of all 4 types of indicators so they can all confirm each other and you can weed out “noisy” trades.
· Bollinger Bands
· ATR (Average True Range)
· Keltner Channel
· Donchain Channel
In the future articles, we will dedicate a post into all these mentioned indicators and how they exactly work while providing back test data.
Volume Indicators
Volume indicators only measure the volume and try to predict what the next big volume jump will be. It is another additional way of analyzing the suitability of price appreciation or description. In another words, it will tell you if a move is a manipulated move or if there is genuine volume and traders backing up the market move.
· Basic Volume Indicator
· OBV (On Balance Volume)
· Chaikin Money Flow
· Klinger Oscillator
In the future articles, we will dedicate a post into all these mentioned indicators and how they exactly work while providing back test data.
Combining Indicators
Now the type of indicators is out of the way let’s look at how we can combine them. Indicators are not perfect! None of them will give you the perfect entry and exit signals. Indicators are basically all a mathematical formula that tracks and records the price in different ways. Therefore, it would be unreasonable to assume that one indicator will work ALL the time. As they have different points of data collection, they will all draw different conclusions at any given moment. In order to maximize their use case, we need to combine them with each other.
One of the mistakes that trades do all the time is that they pick and combine 3 volatility indicators in hopes that it will perform well. Though, the issue here is that all 3 indicators are looking at very similar data pool. Therefore, he will get inconsistent signals.
The best practice here is that to pick one indicator from at least 2 types. If you are going to use Bollinger Bands try combining it with RSI or STOCH in order to get double confirmation on the trades. Though, that doesn’t mean that you should always try to get 4 type of indicator and get mutual confirmation. This approach might result in missing good trades and cluttering your decision making. Trading is all about finding that sweet spot! If you want to use any of the indicators mentioned above and combine them, check out our tradingview scripts as we have implemented ALL of the indicators mentioned above.
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