How To Develop A Combined Trading Strategy
How To Develop A Combined Trading Strategy
Trade With Combined Technical Indicators
Aim this blog post about how to develop a combined strategy to trade forex? There are plenty of better-combined trading strategy. In this forex blog from forex friend loan, learn to trade with combined technical indicators.
I’ll describe technical indicators are used to know when to enter or exit a trade. If you know how to enter and exit a trade, you can easily make profits. That is why choosing better combined technical indicator strategy are important to trade forex.
Knowing what indicators to use and what is the best combination of technical indicators can dramatically improve your chart reading skills. If you use the wrong technical indicators, this can lead to inaccurate price interpretation and subsequently, too bad trading decisions.
However, if you are a price action type of trader that only uses naked charts.
CHART TREND PATTERNS
Why Technical Indicators
Learning the tips, tricks and basically how the Foreign Exchange market works are the key to success in becoming a trader. There are things that an aspiring should learn before starting to trade through the internet. From the basic points and fundamentals of trading in the Foreign Exchange to the numerous lessons to tackle, each one is important to equip the person with the proper mindset for trading forex.
These lessons would also serve as the trader’s tricks up his or her sleeve. They would assist the trader in deciding what move to do next and at the same time, help them understand what the market movement means. One very useful tool that one can learn from forex education is known as technical indicators.
There are actually different kinds of technical indicator today, but there is a way to categorize them. First is known as the oscillator and the other is known as momentum follows. The first category deals with technical indicators which show the trader where a trend is about to start. Being able to be one among the first in a trend is the most profitable position but the risks are great as these oscillator signals can be misleading.
The other currency exchange signal category known as momentum follows. It is named as such because these signals appear where a trend has begun and is already climbing. This lessens the risk of falling for a misleading trend but the money the trader will earn from this is far less compared to the first one.
How To Choose Best Combination Of Technical Indicators
A trading with combined strategy has the danger to become redundant because many times traders use indicators that show the same type of information. To avoid being trapped by this trading fallacy you need to understand that indicators can be classified into three groups, as follows:
Essentially, Let’s say If you trade with a combined indicators strategy that uses the RSI indicator, MACD indicator and the stochastic indicator you are basically using 3 types of technical indicators that belong in the same category.
These are all momentum indicators that are going to display for you the same kind of information in one way or the other. In the above figure, you can notice how all indicators follow each other simultaneously.
This is not good!
The problem with using unfitting technical indicators is that you might actually think the trade signals are stronger if all indicators point in the same direction.
The fix to the overemphasizing information from using indicators that belong to the same group is quite simple. Avoid using technical indicators that display the same kind of information. Trading with combined technical indicators strategy that shows a different type of information.
How To Trade With Combined Technical Indicators
Now comes the fun part. Moving forward, we’re going to highlight what indicators to use for the best combined technical indicators strategy.
Let’s say that We’re going to use two technical indicators: Trend following indicator and Momentum indicator that support and complement each other.
The Stochastic Oscillator is a momentum indicator, it indicates whether the market is moving to new highs or new lows or is just meandering in the middle. This indicator is based on George Lane ‘s observations. A lot of traders like the stochastic oscillator indicator because it’s easy to use.
The Stochastic Oscillator is plotted in two lines Fast %k and Fast %D.
The formula is:
Fast %k = 100 * [( C – L (n) ) / ( H (n) – L (n) )]
Where: C is the most recent closing price.L (n) is the low of n previous trading day (or bar). H (n) is the high price of the same n previous day (or bar). Usually, n is chosen 14.
A 3-period (day or bar) moving average is taken from Fast %k and called Fast %D. Fast %D is used as a signal line in the same way that the moving average of the MACD is used as a signal line for the MACD.
Stochastic Oscillator is plotted in two lines but, usually, these lines cross each other many times. Now to smooth the chart, a 3-period moving average is taken from Fast %D and called Slow %D (Also, Fast %D is called Slow %K), so the smoothed chart is plotted with Slow %K and Slow %D.
Using of Stochastic Oscillator – Momentum Indicator
1- Oscillators are used as an overbought/oversold indicator. A buy is signaled when the oscillator moves below 20 and then crosses back above 20. A sell is signaled when the oscillator moves above 80 and then crosses below 80.
2- Also, when %K crosses above or below %D, Buy and sell signals can be given. But, maybe crossover occurs frequently in short periods and causes bad results. This user isn’t very common.
John Bollinger created Bollinger Bands in the 1960s; Bollinger Bands are used to determine support and resistance levels. This indicator consists of three lines; the middle line is an exponential moving average of price data and the two outside bands are equal to the moving average plus or minus standard deviation.
Standard Deviation is a statistical measure that indicates volatility of price. The bands will expand when price becomes volatile and they will contract during less volatile periods.
Using of Bollinger Bands – Trend Following Indicator
The Bollinger bands are trend following indicator that measures the volatility of any given market. Buying and selling based on the Bollinger bands can be a very effective trading strategy especially if used in combination with other technical indicators.
1- Bollinger Bands are used to determine the boundaries of market movements. If a market moved to the upper band or lower band, then there was a good chance that the market would move back to its average. In the other words, when price closes to upper band, the market is overbought and when price closes to lower band, the market is oversold.
2- Another using of Bollinger bands is that to indicate up-trends and down-trends. If price deflects off the lower band and crosses above moving average then price fluctuate between upper band and moving average, it comes to indicate upper price target.
Trading With Best Combined Strategy
Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules of the trading strategy.
For this forex blog, we’re going to look at the BUY side.
Note* This strategy can be used on any time frame, however, using higher time frame should give the much more profitable result. so go ahead and apply it to your preferred time frame.
Step #1: Price needs to Break and Close above the middle Bollinger Band BB)
The first step is quite easy!
Actually, the whole strategy is so easy to understand that you’ll be able to trade it right away.
So the first trade confirmation we need is for the price to break and close above the middle Bollinger band. Once this trade condition is verified, we can check the other indicators for adding more confluence to our trade signal.
Now, let’s see what the stochastic oscillator indicator has to say about the price action.
Step #2: Wait for the stochastic oscillator indicator to trade above the 20 level.
Everything do at Forex Friend Loan is educational! We always try to make sense of how to correctly interpret the action of any given technical indicator.
During this step, we seek to find an agreement between what the Bollinger Bends is saying and the Stochastic Oscillator own price reading. So, the breakout can be confirmed if the momentum is behind the move.
Step #3: Hide your Protective Stop Loss below the lower Bollinger Band
Knowing where to place your protective stop loss is as important as knowing when to enter the market.
The logical place to hide your protective stop loss is below the lower Bollinger band. A break below the lower BB will invalidate our trade idea, and we want to minimize our losses.
Last but not least, we also need to define a take profit level for our multiple indicator strategies which bring us to the last step.
Step #4: Take Profit when the price breaks below the lower BB
Our take profit strategy only looks at one indicator to signal us a possible exit zone. If we wait for confirmation from multiple indicators then we might as well give back some of our profits.
In this regard, the best way to take profits is when we see the price reversing. A break below the lower Bollinger Band is a good signal for a possible reversal, so we want to cash out our profits.
Note** the above was an example of a BUY trade using multiple technical indicators. Use the same rules for a SELL trade – but in reverse. In the figure below, you can see an actual SELL trade example.
You have to take the necessary time and learn the meaning of each technical indicator. No indicator will give you 100% win rates or even 50% win rates. So don’t be the one chasing fairy tails. In the $6 trillion Forex market, no one can ever predict the market with exact certainty.
However, if you follow our best combination of technical indicators you can improve your chances of winning more often than losing trading the market. You have to keep in mind that all indicators are based on the past price so only a multi-indicator strategy can help you predict the future.