Have you ever caught yourself applying multiple indicators to your chart, the more the better, hoping for a positive outcome? Have you ever wondered if you are using the right combination of indicators?
If you are still confused about what indicators are there for, how to use them and when it is better to apply one or another indicator, this article is for you. Let’s break it down, making it as easy as possible to start applying technical analysis to your chart right now.
Why do you need them
A technical indicator can be applied to the chart of the asset in order to analyze the previous market movement and define the patterns. The essence of any indicator is a mathematical calculation which result allows traders to make predictions about the future price progression.
Technical indicators are of great use for short-term traders. As they do not involve an analysis of the fundamental business (earnings, revenue etc.), they will not be helpful for long-term investors.
It is important to understand how to classify indicators and how to use different types of them correctly. A precise implication of indicators helps for a more accurate prediction of the price movement. In general, it is essential to understand what exactly each indicator represents and what you need to take into consideration when applying them.
All indicators can be divided into two categories: trend indicators and oscillators.
They determine the trend by smoothing the volatility that naturally occurs on the chart. They are usually based on the past chart activity and some, like MACD, for instance, can also measure the strength of the trend.
Trend indicators are great to use in order to determine the direction of the trend and decide when to enter the deal. At the moment you may find such trend indicators like Moving Average, Bollinger Bands, Alligator, MACD, Parabolic SAR, and Ichimoku Cloud on the platform. It is easy to distinguish trend indicators, as for the most part they are displayed on the chart itself, whereas oscillators are usually displayed below the chart.
These indicators determine short-term overbought or oversold conditions. They are useful to find the pivot points as the price does not stay in the overbought or oversold area for a long time.
Oscillators are not as effective in a trending market and they are best used when the chart is not showing a strong trend in either direction. They generate entry and exit points at the moments when the asset price strays too far from the usual range. The most popular oscillators include RSI, Stochastic and the Awesome Oscillator.
How to combine?
In order to combine successfully, you need to define the type of the indicator that you are about to use. Why? Because using several indicators of the same type will simply lead to duplicate signals – more is definitely not better in this case.
The rule you may want to remember is that the optimal combination involves indicators that compliment and not repeat each other. Using more than 3-4 indicators on the chart may be unnecessary, so choose fewer, but do it wisely.
You may also combine your indicators with fundamental analysis for a more complete picture.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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