Which indicator should i use

Knowing which one belongs to which category, and how to combine the best indicators in a meaningful way can help you make much better trading decisions. On the other hand, combining indicators in a wrong way can lead to a lot of confusion, wrong price interpretation and, subsequently, to wrong trading decisions.

Not good! Essentially, all 3 indicators provide the same information because they examine momentum in price behavior. You can see that all indicators rise and fall simultaneously, turn together and also are flat during no-momentum periods red boxes. Again, the purpose of both indicators is the same: identifying trend strength. You can see that during a trend, the Bollinger Bands move down and price moves close to the outer Bands.

At the same time, the ADX is high and rising which also confirms a trend. During a range, the Bollinger Bands narrow and move sideways and price just hovers around the center. The ADX is flat or going down during ranges giving the same signal.

The problem with indicator redundancy is that when a trader picks multiple indicators that show the same information, he ends up giving too much weight to the information provided by the indicators and he can easily miss other things.

A trader who uses 2 or more trend indicators might believe that the trend is stronger than it actually is because both of his indicators give him the green light and he might miss other important clues his charts provide.

The following table arranges the most commonly used indicators by categories. Now, you can avoid using indicators that are from the same category and combine indicators from different categories that complement each other.

The screenshot below shows a chart with three different indicators that support and complement each other. Note here that we do not use the Bollinger Bands as a trend indicator but just for volatility.

We will go through points 1 to 5 together to see how the indicators complement each other and how choosing an indicator for each category helps you understand the price much better. During that trend, support and resistance broke as long as the ADX kept above 30 and rising. Point 2: The ADX has turned and shows losing bullish trend strength — an indication that the support level might not break.

Price did not make it past the Bollinger Bands and bounced off the outer Band. Point 4: The same holds true for point 4 — the ADX is still below In a range, the trader has to look for trendlines and rejections of the outer Bollinger Bands; the RSI shows turning momentum at range-boundaries.

The MACD indicator is visualized as two moving averages a shorter and a longer one , oscillating around the zero line. Occasionally, they might cross it or diverge and converge. These movements generate trading signals like crossovers, convergences the lines move towards each other , or divergences the lines move away from each other.

By keeping track of the MACD line, the trader can discover when a new trend is about to form. Traders use the MACD to identify overbought or oversold markets better. Bollinger Bands are among the most popular volatility indicators.

It was introduced in the s by John Bollinger. Using a Moving Average, sandwiched between two trading bands a positive and a negative standard deviation apart , the indicator signals the price volatility levels and their change over time. The day trading indicator is straightforward and extremely handy as it combines all the needed pricing information within a simple and easy-to-comprehend shape on the price chart.

Traders use Bollinger Bands to identify overbought and oversold market conditions. If the price breaks the upper line, the signal is bearish. The price is expected to drop i. On the other hand, if it breaks the lower line, the price is expected to increase. Understandably, this is a good moment to buy. Bear in mind that Bollinger Bands is prone to generating false trading signals. To avoid being deceived, make sure to wait for firm confirmation of the signal or combine it with additional tools.

If you open a position before that, you risk ending up on the opposite side of the trend. The strength of the price movement is measured in a positive or a negative direction.

The ADX consists of three separate lines. The ADX itself indicates the strength of the trend. If the ADX shows values above 25, the movement is considered strong. On the other hand, values below 20 indicate that the trend is weak. Collectively, the indicator helps day trading pros assess whether they should go long or short or avoid trading at all. The indicator consists of different levels horizontal lines plotting the most likely zones where support and resistance can form.

The zones are identified based on the Fibonacci numbers. A sell signal occurs when the fast line crosses through and below the slow line.

The relative strength index RSI is another oscillating indicator but its movement is contained between zero and so it provides different information than the MACD. One way to interpret the RSI is by viewing the price as " overbought "—and due for a correction —when the indicator in the histogram is above 70, and viewing the price as oversold—and due for a bounce—when the indicator is below In a strong uptrend, the price will often reach 70 and beyond for sustained periods of time.

For downtrends, the price can stay at 30 or below for a long time. While general overbought and oversold levels can be accurate occasionally, they may not provide the most timely signals for trend traders. An alternative is to buy close to oversold conditions when the trend is up and place a short trade near an overbought condition in a downtrend. For example, suppose the long-term trend of a stock is up.

A buy signal occurs when the RSI moves below 50 and then back above it. Essentially, this means a pullback in price has occurred.

So the trader buys once the pullback appears to have ended according to the RSI and the trend is resuming. The levels are used because the RSI doesn't typically reach 30 in an uptrend unless a potential reversal is underway. A short-trade signal occurs when the trend is down and the RSI moves above 50 and then back below it.

Trendlines or a moving average can help establish the trend direction and in which direction to take trade signals. Volume itself is a valuable indicator, and on-balance volume OBV takes a significant amount of volume information and compiles it into a single one-line indicator.

The indicator measures cumulative buying and selling pressure by adding the volume on "up" days and subtracting volume on "down" days. Ideally, the volume should confirm trends. The figure below shows the shares of Netflix Inc. Since OBV didn't drop below its trendline, it was a good indication that the price was likely to continue trending higher even after the pullbacks.

If the price is rising and OBV is flat-lining or falling, the price may be near a top. If the price is falling and OBV is flat-lining or rising, the price could be nearing a bottom. Indicators can simplify price information, in addition to providing trend trade signals and providing warnings about reversals.

Indicators can be used on all time frames, and for the most part, they have variables that can be adjusted to suit each trader's specific preferences. Traders can combine indicator strategies—or come up with their own guidelines—so entry and exit criteria are clearly established for trades.

Learning to trade on indicators can be a tricky process. If a particular indicator appeals to you, you may decide to research it further. Most importantly, it's a good idea to test it out before using it to make live trades. You could also use twist-on or small pegged indicators in most similar situations, if you like. I slather it with floatant to ensure that it stays on the surface and floats straight upright. One of the big advantages of the yarn indicator is that, when it is floating upright, it is extremely sensitive.

Before the indicator actually stops, it will tip to one side, giving you a split-second advantage and the ability to detect subtle takes. Again, these are personal preferences. As long as you take into consideration the five factors above when choosing an indicator, the style you choose is up to you.

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