Home Trading Strategies How To Combine Trading Indicators Like A Pro (Cheat Sheet)

How To Combine Trading Indicators Like A Pro (Cheat Sheet)

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How To Combine Trading Indicators Like A Pro (Cheat Sheet)

Hey, hey, what’s up my friend? In today’s  episode, I want to share with you how to   combine trading indicators like a pro. Here’s the thing, when new traders get started   in trading, one of the first things they look  for is indicators.

moving average, MACD, RSI.   Then they’ll wait for all these indicators to  align, thinking that the more indicators align,   the higher the probability of the trading setup.   But that couldn’t be further from the truth.

  Why is that? Well, I’ll explain more in today’s   episode. But firstly, you must… 1. Understand the purpose behind using indicators   Based on my trading experience, most indicators  can be used for one of these four categories:   1.

To identify market conditions whether  the market is in a range or a trend, whether   it’s in a low volatility environment, etc. 2. To serve as an entry trigger to enter a trade   provided the other market conditions are met.

3. To signal to you when to exit a trade   depending on whether you want to be  riding a trend or whether you want   to capture a swing in the market. 4. To identify areas of value on   your chart especially when the market is  trending.

For example, in a healthy trend,   the 50-period moving average is a very  useful tool to identify areas of value.   These are the four main categories of what  the indicators can be used for and you must   understand this.

Once you understand  this, then the second thing is to   understand how to use your indicators. 2. Understand what each indicator is about   Yes, most indicators can serve one of those  four purposes, but some indicators can serve   all of these four purposes while some of these  indicators can only meet one or two of these   purposes.

Let me explain. Fibonacci extension   For example, the Fibonacci extension is an  indicator that can be used to help you exit your   trade, especially in trending markets there’s  a series of higher highs and higher lows.

  When you are trading with the trend, as the  market is going up, you might want to exit   your trade before it makes a pullback, but  which point of reference should you use to   know when to exit before the pullback occurs? This is where the Fibonacci extension tool can be   useful.

You can use the 127 extension or the 138  extension as a reference to exit your trade. This   is how the Fibonacci extension tool is useful. Average True Range indicator   On the other hand, you can also use a tool  like the Average True Range indicator:   1.

To define the volatility of the market 2. To use the information about market volatility   to set better stop loss – even using it to trail  your stop loss in a trending market as well   You can see that the ATR indicator  serves multiple purposes.

And finally…   Moving average This indicator   is even more versatile, it can help meet all  four of the categories that I shared earlier:   1. It can help you identify the market  condition, where it’s trending or ranging.

  2. It can help you identify an area of  value. What I shared earlier is using   the 50-period moving average in a healthy trend. 3. It can help you serve as an exit trailing your   stop loss with the hopes of riding a trend 4.

As for the entry trigger,   something like a moving average crossover  can also serve as an entry trigger.   You can see that you must understand the purpose  of your indicators to see where it fits among the   four categories.

Some indicators meet only one or  two categories. Some indicators, like the moving   average, can fulfil all four categories. It pays to understand the purpose of your   indicators. Moving on… 3.

   Understand what you need out of your indicators Some of you might be a price action trader and   using indicators to supplement your trading.  For example, you might read the naked charts   to identify the current market condition, but  you can use indicators to help you manage your   trade and set a proper stop loss or trail your  stop loss with the hopes of riding a trend.

  You have to know what you need in the  first place and what you want out of   your indicators. Because if you do not know  what you want out of your indicators, then   it’s going to be a complete mess.

You’ll just pick everything and   anything that comes your way in  your trading and it’s pointless.   4. Use only one indicator from each category For example, let’s say you’re using the moving   average to manage your trades, to exit your  trade or to trail your stop loss.

That’s fine.   But don’t use moving average together  with the Chandelier Kroll Stop – don’t   use all these other fancy indicators  to manage your trades because this is   where you’re going to get conflicting signals.

Just one indicator from one category is enough. If   you want to use an indicator, for example,  as an entry trigger to enter your trade,   then just use one indicator. Maybe use  the RSI crossing above 30.

Don’t use the   RSI together with the stochastic indicator. Don’t use too many indicators to time your entry   because if you have too many indicators for one  category, you will get conflicting signals.

So   pay attention to that as well. Let’s do a quick recap…   Recap 1. Know the categories of what the trading   indicators can be used for: it can help define  market conditions, identify areas of value,   serve an entry triggers or exit your trades 2.

Know the purposes of your indicators out   there – this means that you must  understand what this indicator   is about, how it works and stuff like that 3. Know what you need – do you need help with   defining the trend or with entering your trades 4.

Use not more than one trading indicator   from each category – if not, you will get  conflicting signals and you’ll be confused   With that said, I’ve come to the end of  today’s episode. I will talk to you soon.

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