How to Combine Trading Indicators for a More Accurate Analysis

The most reliable way to obtain information for the purpose of price movement analysis is through what is known as technical analysis. This form of analysis involves countless indicators which provide you with various formulas which on their own provide you with the analysis taken from price movements and market patterns. While these indicators can be quite powerful and reliable all on their own and even singular indicators can do your trading process a lot of good, sometimes you just need to use their collective power. 

This means, banding together multiple indicators or combining them with each other in order to obtain a more accurate analysis from their combination. This provides many advantages to the analysis process. And that is what we are going to focus on in this article. We will discuss the idea of combining indicators and also provide you with some examples of optimal combination of indicators. 

The Importance of Combining Indicators

Before we get to the actual combination of indicators, we first need to understand why it is important to combine them. You need to understand that while each indicator has its upsides and advantages, especially those that are more well-known and powerful, they do still have their limitations. Some examples can include the following: 

• A good example are the trend indicators like Moving Averages (MA). While they are widely applied and provide traders with valuable information, they do have a single drawback that makes them weak in this regard. Trend indicators can lag behind price movements. This means there is a lag between when a price action or price movement forms in the market and the time at which this movement is represented through the indicators. 
• Another good example can be oscillators such as the relative strength index or RSI. Again, while quite extensively used, even a popular and useful indicator such as the RSI might generate false signals in trending markets.

So as you can see, there are lots of reasons for why it is a good idea to learn how to combine indicators and use their combined power and insight. 

There are a lot of advantages in combining indicators with each other. You can probably guess what they are, as we have already alluded to them, but here are the most important upsides that you can gain from using technical indicators in conjunction with each other. 

1. Cross-Validate Signals: this is the most important advantage of using indicators with each other. They can simply confirm the information of the other. So when you are using a certain technical indicator and you have already obtained certain insights from it, almost all professionals suggest that you use another indicator merely so that you can confirm that information before acting on it. 
2. Filter Out Noise: when a certain result or information is obtained through the application of an indicator, more often than not it is in a scope which means it is less precise than you think. The result is often clouded by the noise in the market. This is exactly why sometimes when you act on the data obtained from an indicator, it does not go the direction you had anticipated. Here through the use of other indicators in conjunction with each other, you can filter out the noise in the market and get a clearer and more precise result. 
3. Adapt to Market Conditions: another advantage that comes from combining multiple information for a more accurate analysis is that it can help you adapt better to changing market conditions. There are so many different aspects that are involved in market movements, such as different trends, momentums, and volatility. Through the use of multiple indicators, you can become more prepared to handle and adapt to market conditions. 

Choosing the Right Indicators

So far, we have established why it is a good idea to combine multiple indicators for a better result in the forex market or trading in any other financial market. At this point, we need to address how you can go about choosing the right indicators. Using indicators in conjunction does not mean you can just throw any indicators together and hope to get the advantage that we discussed above. In order to obtain the upsides of this action, you need to combine just the right ones. 

In later sections we will precisely show you combinations that work particularly well with each other. For now, we want to present you with a general notion of how indicators work together. 

A general rule of thumb when it comes to combining indicators is to use those that serve different purposes and provide different types of insight. If you use the exact same type of indicators with each other, then you will merely obtain redundant data on top of each other. For instance, using multiple trend indicators with each might not be such a good idea. It would perhaps be better to mix and match so-to-speak! 

In order to do that, you need to be familiar with the general makeup of the different types of indicators. The following is a list of just that: 

1. Trend Indicators: as the name suggests, these indicators can help you identify the general trend or the direction of the market.
   • Examples: Moving Averages, Parabolic SAR, Ichimoku Cloud.
2. Momentum Indicators: these indicators can help pinpoint the force or strength of the trends in the market. This means how fast or strongly a trend is moving in a certain direction. 
   • Examples: RSI, MACD, Stochastic Oscillator.
3. Volatility Indicators: these are among the most used and widely applied indicators and of course as the name suggests, these indicators are used in identifying the volatility of the market. 
   • Examples: Bollinger Bands, Average True Range (ATR).
4. Volume Indicators: this is where you can identify the amount of market participation through the trading volume registered. 
   • Examples: On-Balance Volume (OBV).

To wrap up again so far, we have also presented you with the major types of indicators so that you would know what it means to combine from different categories. It is time to get to the point and present you with actual examples. 

Popular Indicator Combinations

When it comes to combining indicators with each other, the limit is your imagination only. Well not really imagination, but perhaps years of hard work to build up your intuition and knowledge as a trader. So, while there are literally countless combinations depending on any trader’s discretion and preference, the following is a list of the most well-known indicator combinations, especially from different categories and indicators types. 

1. Trend + Momentum

• Combination: Moving Average + MACD
• This is when we would use a simple moving average (SMA) in order to identify the overarching trend in the market at any given time. Then we can apply moving average convergence divergence (MACD) to obtain confirmation of the trend through momentum when the lines in MACD cross the direction of the trend. 

2. Trend + Overbought/Oversold

• Combination: Bollinger Bands + RSI
• This is another winning combo which is used extensively by traders. In this case, you would implement the Bollinger Bands in order to identify market volatility or the price extremes that are registered in the market and then use the relative strength index (RSI) in order to identify potential overbought and oversold areas in the market. Together, they can help you find the best entry points to take action on insights such as a potential reversal. 

3. Volatility + Trend

• Combination: Bollinger Bands + Parabolic SAR
• Another good combination is to use the Bollinger bands with the parabolic SAR. The way it works is that the Bollinger Bands will help you identify market volatility. And then the parabolic SAR will help you confirm the trend direction of the market and also it can help you set your stop loss levels. Put that all together and you get a clear insight into the big picture movements of the market to make a sound decision. 

There are so many other combinations and we obviously cannot name all the possible ones. But these examples should have given you a good image of what it means to combine indicators with each other and how they can work together. 

Common Mistakes to Avoid

Just like using technical analysis as a whole and in general, using technical indicators in conjunction should also be done with the necessary cautionary steps. Here are the most common mistakes that you need to avoid when combining multiple indicators for an accurate analysis. 

1. Overabundance of Indicators: while it is clearly a good idea to combine indicators with each other, as is the premise of this present article, do keep in mind that using too many of them together is not such a good idea. Doing so will only lead to confusion and decision paralysis. 
2. Using Correlated Indicators: we have already mentioned this one above, but as a mistake it is worth mentioning again. Make sure that you do not use indicators that are too similar to each other in combination. 
3. Ignoring Risk Management: it is true that using a combination of indicators can increase your odds of accuracy and precision in market analysis, but do remember that nothing is 100% certain in any financial market. So even when you are using multiple indicators for enhanced accuracy, make sure not to neglect risk management if things go south. 

Conclusion

Trading in any financial market, including the forex market, is a daunting task that necessitates navigating through constant changes and sudden movements. In order to be successful in this journey, you need to exert any effort to successfully analyze the path in front of you. In this article, we discussed the notion of using multiple indicators for a more accurate analysis. As we saw, combining technical indicators with each other can have many advantages including increased accuracy and precision. So next time you want to use technical analysis, give this approach a try and increase your odds of success as a trader.