When it comes to trading in the financial markets, having several trading strategies is crucial for success. While individual technical indicators can provide valuable insights, combining multiple indicators can further enhance your trading strategies. By using a combination of indicators, traders can reduce the risk of false signals and increase the probability of profitable trades. In this post, we will explore the benefits of using multiple indicators and provide some examples for smart trading approach.
The primary advantage of using multiple indicators is the ability to confirm trading signals. Single indicator can provide interesting signals but often will lead to a false one. Using an initial (Trigger) and use other one is a good solution to confirm a trend and its direction. The trick is not to use the same (As in another post). Indeed, several indicators are showing exactly the same things and therefore are not reinforcing anything…
For example, let’s say you are analysing a stock using both the Bollinger Bands© Crossing and the relative strength index (RSI). If the BB indicates a bullish crossover and the RSI shows the stock is in oversold territory, it adds more weight to the bullish signal. This convergence of signals from different indicators strengthens the case for a potential profitable trade.
Another benefit of using multiple indicators is the ability to diversify indicator types. Different indicators have varying strengths and weaknesses and combining them can help compensate for any shortcomings. For instance, while trend-following indicators like moving averages can identify the direction of a trend, oscillators like the stochastic oscillator can help identify overbought or oversold conditions.
By using a combination of trend-following and oscillator indicators, traders can gain a more comprehensive understanding of the market dynamics. This diversification of indicator types can help traders identify high-probability trade setups and avoid entering trades based on a single indicator’s signal.
In addition to diversifying indicator types, adjusting the parameters of each indicator can enhance trading strategies. The issue is to combine all the data needed to adjust the parameter automatically. And it is a lot of data, from market conditions to stock specific data, we are talking about million. This where tools like Artificial Intelligence are coming into play.
For example, let’s consider the moving average indicator. AI can use past data to adjust the length of the MA’s (like 20 to 25 days) A shorter moving average may be more responsive to short-term price movements, while a longer moving average may smooth out noise and provide a better indication of long-term trends. Experimenting with different parameter settings can help traders find the optimal combination for their trading strategy but is highly time consuming and required back testing when the AI actually knows in advance what are the optimal parameters.
To illustrate the effectiveness of using multiple indicators, let’s examine a case study. Let’s take the S&P500 since 24/06/2023. As a trigger indicator, let’s use Bull Bear Power. If use as single indicators for Buys and Sell, the last 11 years would have looked like this:
The number of trades would have been 141 buys for 149 sells. The results between the Buy and sell would have generated a 50.78% profitable trades.
By combining RSI (Indicating when the stock is Overbought or Oversold) the system is getting smarter because it only Buy when the stock is in an Oversold situation and Sell only when the stock in Overbought situation. During those Overbought or Oversold situations, the chances or reversal are a lot higher.
Using the combined indicators, the graph shows only 49 Buys and 30 Sells with more than 90% of profitable trades. The parameters are optimized by AI and can vary. Typically RSI is used at 30/70 but in this case the parameters are adjusted according to market conditions and volatility of the S&P500 (Could be any stock).
When using multiple indicators, it’s essential to keep a few tips in mind:
Avoid overcomplicated strategies by combining too many indicators.
Combine only the ones that are complement each other.
Use AI or past data to adjust the parameters.
Backtest all strategies using historical data to assess its effectiveness before applying it to live trading.
