How to combine indicators for better trading?

In trading, where time is of the essence and strategies are won and lost in nanoseconds, chart-based methods represent the core of several winning methods. Indicators of a technical nature, whose role is to process past price information to predict future market trends, are also indispensable to traders who wish to make relevant decisions. 

However, the signal is usually incomplete or inaccurate when using one indicator. Here is where it is important to combine indicators used in chart strategies. Combining indicators allows traders to improve the precision of their forecasts, lower the number of false alerts, and create resilient strategies. 

Why combine indicators?

Indicators enrich the analysis, allowing for a more well-rounded market evaluation, confirming signals, filtering noise, and aligning strategies with market conditions. When relying on chart indicators, the objective should not be flooding traders with too much data but establishing a framework where all indicators work harmoniously. Technical indicators break into four categories, which are as follows:

Key principles for combining indicators

To make the most of combining indicators, follow these simple principles:

• Choose additional complementary indicators: Pick indicators that belong to different categories to avoid overlap.
• Restrict indicator count: Two to four indicators are usually enough. Too many create confusion.
• Test and optimise: Always backtest with historical data. Fine-tune your system in a demo before risking real money.
• Emphasis on confirmation: Let one indicator give the first signal, and others confirm it. 

Some popular indicators

To illustrate how to combine indicators, let’s review some widely used indicators and their roles:

Step-by-step guide to combining indicators

Here’s a practical guide to combine indicators for chart strategies:

Step 1: Define your trading goal

Determine your style of day trading, swing trading, or long-term investing. This choice will guide your indicators setup.

Step 2: Choose a primary indicator

Once you’ve established your trading objective, choosing a technical indicator that complements your strategy is essential. Consider the following options:

• Select an indicator that aligns with your goal.
• For trend-based strategies, a Moving Average is a strong starting point.
• For momentum strategies, RSI or MACD may be ideal.
• This primary indicator will serve as the main signal generator in your analysis.

Step 3: Add confirmatory indicators

Choose one or two indicators to confirm the primary signal. 

• Moving Average-based trend strategy
• RSI to gauge momentum 
• Bollinger Bands to assess volatility. 

Step 4: Set rules for entry and exit

Define clear rules based on the combined signals. For example:

• Entry: Buy when the 50-period EMA crosses above the 200-period EMA (trend signal), RSI is above 50 (momentum confirmation), and price is near the lower Bollinger Band (volatility support).
• Exit: Sell when RSI reaches 70 (overbought) or the EMAs cross in the opposite direction.

Step 5: Backtest and refine

Use historical data to test your strategy’s performance. Adjust parameters, such as indicator periods or thresholds, to optimise results.

Here is an example

Let’s walk through a trend-following strategy using 50-period EMA, RSI, and MACD indicators.

1. Primary Signal (EMA): A bullish trend is identified when the 50-period EMA crosses above the 200-period EMA, signalling a potential uptrend.
2. Confirmation (RSI): Check RSI to ensure it’s above 50, indicating positive momentum. Avoid entering if RSI is below 30, which may suggest weakening momentum.
3. Additional Confirmation (MACD): Confirm the trend with MACD. A bullish signal occurs when the MACD line crosses above the signal line, and the histogram is positive.
4. Entry: Enter a long position when all three conditions are met.
5. Exit: Exit when RSI reaches 70 (overbought) or the EMA or MACD signals reverse.

Common mistakes to avoid

When combining indicators for chart strategies, traders often fall into these traps:

• Overloading charts: Using too many indicators creates clutter and confusion, so stick to a lean setup.
• Ignoring narket conditions: Applying trend indicators in choppy markets or oscillators in strong trends leads to poor results. Adapt your combination to the market.
• Neglecting risk management: Even the best indicator combinations can fail. Use stop-losses and position sizing to protect your capital.
• Skipping backtesting: Trading without testing your strategy is like driving blind. Always validate your approach.

To conclude

Mastering how to combine indicators is a key to success with indicators for chart-based strategies. By choosing complementary tools, setting clear rules, and testing them, traders can spot strong opportunities and reduce risks. A balanced mix of moving Averages, RSI, Bollinger Bands, or MACD ensures each indicator supports the others. Start simple, backtest, and refine to build a strategy that fits your trading style.