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Thursday, February 11, 2010

Combining Indicators

For me there is nothing worse than a messy chart. Sometimes I see some of my students charts and wonder how they can trade at all with the numerous arrows and indicators on their charts.


Trading can be as simple or difficult as we choose to make it and I realize that not every trading method suits everyone. In this article I have combined a number of indicators to confirm entries and still managed to keep the chart uncluttered.

Often using too many indicators only cause confusion and it is difficult to decide whether to combine trending indicators, oscillators or volume indicators. here are some indicators that work pretty well together.

I have used the following combination of indicators.
  1. Current Trend line Break
  2. Exponential Moving Average (Represented by the Red or Green Arrows) Setting 5/8
  3. RSI with a 14 setting and only enter the trade when the 50 Line is crossed, this indicator is represented by the orange and blue candles. (When the candles are orange the RSI has crossed the 50 line short. When the candles are blue it has crossed the 50 line long.
  4. Stochastic with a 14,3,3 setting with 90, 10, 40, 60 levels
  5. Momentum indicator with a 21 moving average cross. The momentum setting is 10 with zero level added.
  6. Laguerre filter line; with a gamma setting of 0.60, which is similar to a 21 exponential moving average.
In Spite of all the indicators the chart is still uncluttered and visually easy to analyse at a glance.

The trade setup is simple, when price crosses above or below the Laguerre filter line we check to see if all the indicators are in sync.

For a long trade, price must open above the Laguerre filter line; The candles must turn blue representing the RSI Cross above the 50 line.

A green arrow must appear representing the EMA cross.

We also check if the new candle has opened above the current down trend line. Occasionally we do not get the trend line break; then we can use the stochastic or momentum indicator to determine if the trend line has been broken.

The Stochastic must cross up through the 40 line

The momentum line must cross up through the Zero line and the 21 moving average must have crossed up through the momentum line.

When all 6 are lined up we can enter the trade long.

For a short trade, price must open below the Laguerre filter line; The candles must turn orange representing the RSI Cross below the 50 line.

A red arrow must appear representing the EMA cross.

We also check if the new candle has opened below the current up trend line. Occasionally we do not get the trend line break; then we can use the stochastic or momentum indicator to determine if the trend line has been broken.

The Stochastic must cross up through the 40 line

The momentum line must cross down through the zero line and the 21 moving average must have crossed down through the momentum line.

When all 6 are lined up we can enter the trade short.

I have used this setup on the 1 hour time frame and it seems to work well on most currency pairs. The stop loss is always above or below the previous high or low in the market. The take profit I determine with Fibonacci; or based on my normal money management policy.

The following USD/CAD shows a number of entries on the 1 hr time frame (Click to enlarge)
Obviously during quiet periods it can give false entries. I have used the system successfully during the Euro/London and US trading sessions.



The dotted vertical line has been used to show that all the indicators are lined up at the price indicated on the chart. As we can see not all the trades are big moves; but the system does offer many good trading opportunities.

The system creates a quick and easy visual representation of the current market situation in spite of all the indicators used. Obviously patience is a pre requisite for this system waiting for all the indicators to confirm.
Summary
  • Wait for current trend line break
  • Candles must change colour before entering in a new direction.
  • EMA Arrow must appear.
  • Candles must open above or below the laguerre filter line or 21 EMA
  • Stochastic must cross (short below the 60 line or long above the 40 line. it should not be above the 90 or below the 10 levels when entering a trade as the market could already be overbought or oversold.
  • Momentum must cross above the Zero line (long) below the zero line (short)

26 comments:

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