How to Develop Your Own Technical Indicator and How to Back-Test It.

As you can see, while these categories of indicators are trying to determine the same thing—whether prices are about to increase, decrease, or remain stable—the angle they each offer is unique. Looking at the market from multiple different angles can help you develop a more accurate, realistic, and actionable perspective.

Essentially, if you trade with a multi-indicator 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.

Secrets of Boosting Your Trading Skills using Technical Analysis Indicators

In the above figure, you can notice how all indicators follow each other simultaneously. 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. The best strategy multiple indicators combine indicators that show a different type of information.

Five Indicators To Build A Trend Following Strategy

The Relative Strength Index is a momentum indicator and a leading indicator at the same time. The OBV indicator is based on the idea that both the volume and the price activity are equally important. In this regard, the OBV combines both price and volume to show you the total amount of funds going in and out of the market. The screenshot above shows how your chart setup should look if you followed the above instructions.

The main idea behind the On Balance Volume indicator is that the market price will follow where the volume flow is going. The Ichimoku Cloud is another popular trend indicator. Ichimoku Kinko Hyo will plot several different lines on a chart that make it easy to identify future instances of strong support or resistance. In order to get an accurate movement reading, each of these lines will need to be accounted for. The blue line the base line will plot the average of the highest high and the lowest low over the past 26 trading periods. Similarly, the red line the turning line will plot the average of the highest high and the lowest low over the past nine trading periods.

The lagging green line will plot the closing price 26 periods in the past. This will help provide you with a better perspective on monitoring trends. The last step is to take the trend line and shift it 26 periods ahead. Once all of these lines are plotted together, you will have a wide-reaching view of the market.

From here you will be able to decide whether there is a trend strong enough to justify opening a new position. Bollinger bands is the best 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.

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For our strategy, you will need to use three to four technical indicators in order to successfully trade. Collectively, these indicators account for the trend, momentum, and volume aspects of trading that all traders should pay close attention to. 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. So the first trade confirmation we need is for the price to break and close above the middle Bollinger band.

Technical analysis

Once this trade condition is verified, we can check the other indicators for adding more confluence to our trade signal. Everything we do at Trading Strategy Guides is logical! 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 RSI own price reading. So, the breakout can be confirmed if the momentum is behind the move. Usually, an RSI reading above the 50 level is considered as a positive momentum while an RSI reading below the 50 level is considered negative momentum.

Sometimes, we need to wait longer for the bullish momentum to show up. Step 3: Wait for the OBV indicator to rise. Buy at the market once you see volume confirming the price. The last trade condition before pulling the trigger is again easy to understand. We want to trade on the side with the smart money.

In this regard, we look for evidence that the trade we want to take as real buying power behind it. We can notice that the real volume only showed up later.

The next important thing we need to establish for our scalping strategy is where to place our protective stop loss. 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 strategy which brings us to the last step. 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. Use the same rules for a SELL trade — but in reverse. In the figure below, you can see an actual SELL trade example.

If these indicators ever give contradicting buy or sell signals—something that does occasionally happen—it will be up to you to decide if you are willing to open a riskier position. On the other hand, when each of these indicators confirms the signals being sent from the others, you can be much more confident with your trades.

You have to take the necessary time and learn the meaning of each technical indicator. Here is how to apply technical analysis step by step. 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. Please leave a comment below if you have any questions about the Best Combination of Technical Indicators!

Please Share this Trading Strategy Below and keep it for your own personal use! Thanks Traders! We specialize in teaching traders of all skill levels how to trade stocks, options, forex, cryptocurrencies, commodities, and more. Our mission is to address the lack of good information for market traders and to simplify trading education by giving readers a detailed plan with step-by-step rules to follow.

Thanks, so I do not understand why you mentioned Ichimoku in the strategy? I am waiting for your response. Modern technical analysis software is often available as a web or a smartphone application, without the need to download and install a software package. Since the early s when the first practically usable types emerged, artificial neural networks ANNs have rapidly grown in popularity.

They are artificial intelligence adaptive software systems that have been inspired by how biological neural networks work. They are used because they can learn to detect complex patterns in data. In mathematical terms, they are universal function approximators , [36] [37] meaning that given the right data and configured correctly, they can capture and model any input-output relationships. As ANNs are essentially non-linear statistical models, their accuracy and prediction capabilities can be both mathematically and empirically tested. In various studies, authors have claimed that neural networks used for generating trading signals given various technical and fundamental inputs have significantly outperformed buy-hold strategies as well as traditional linear technical analysis methods when combined with rule-based expert systems.

While the advanced mathematical nature of such adaptive systems has kept neural networks for financial analysis mostly within academic research circles, in recent years more user friendly neural network software has made the technology more accessible to traders.

Systematic trading is most often employed after testing an investment strategy on historic data. This is known as backtesting. Backtesting is most often performed for technical indicators, but can be applied to most investment strategies e. While traditional backtesting was done by hand, this was usually only performed on human-selected stocks, and was thus prone to prior knowledge in stock selection.

With the advent of computers, backtesting can be performed on entire exchanges over decades of historic data in very short amounts of time. The use of computers does have its drawbacks, being limited to algorithms that a computer can perform. Several trading strategies rely on human interpretation, [41] and are unsuitable for computer processing.

Keep on learning

John Murphy states that the principal sources of information available to technicians are price, volume and open interest. However, many technical analysts reach outside pure technical analysis, combining other market forecast methods with their technical work. One advocate for this approach is John Bollinger , who coined the term rational analysis in the middle s for the intersection of technical analysis and fundamental analysis.

Technical analysis is also often combined with quantitative analysis and economics. For example, neural networks may be used to help identify intermarket relationships. Investor and newsletter polls, and magazine cover sentiment indicators, are also used by technical analysts. Whether technical analysis actually works is a matter of controversy.