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why hello there thank you for joining me
for another in depth with chris episode
in the beginning of a trader's career
it's very common for a trader to first
start off with deciding what type of
technical analysis indicator they want
to use to give themselves a competitive
edge over the market or at least that's
what the goal is except it's very common
for traders to use overlapping
indicators or indicators that don't
truly complement each other today we're
going to discuss exactly how we can
identify which indicators we should
avoid putting on top of each other due
to the fact that it might create
redundant signals and we do not want
redundancy because at the end of the day
it will only further confirm a wrong
answer just as much as it'll further
confirm a right answer but without
further ado let's get going
having overlapping indicators can be
very comparable to having too many yes
men around and what i mean by yes men
are those friends that only completely
agree with absolutely everything you say
it can be good for the ego but bad for
pretty much everything else it is good
to have indicators that dispute the view
or provide an alternative view to allow
us to get a more clearer picture of
what's going on if we have an indicator
constantly repeating what another
indicator is saying it's not really
doing us all that much good and that's
what we refer to as a redundant read so
let's start off with the types of
technical analysis indicators and you
see what we've done here with the types
of blood we have leading and lagging and
then they're further broken down by what
they're measuring such as volume trend
momentum and volatility we'll start off
with discussing what leading is so
leading is going to be something that is
helping us predict the future price
movement of an asset by trying to
forecast the next price move after
looking at historical prices so a lot of
times traders use a leading indicator to
try to spot a reversal point in the
market
lagging indicators on the other hand are
going to follow price and their signals
are usually going to come after price
has already changed but these are good
for traders because it can help confirm
the signals from other indicators an
example of a lagging indicator that we
all probably use would be some type of
moving average
then the indicators get classified
further whether they're leading or
lagging by what they're measuring so the
first thing is volume and a volume
indicator measures the dynamics in
trading volume for a particular asset
which in short is the buying and selling
activity then we have trend trend
indicators can help determine the price
direction based on historical data and
then go ahead and generate buying and
selling signals hopefully then we have
momentum indicators which are going to
help us evaluate the trends strength and
predict whether it will reverse or
continue with its current momentum or
current movement then we have the
volatility indicators which are
analyzing price changes within a certain
period to help us evaluate the state of
the market
the idea of using different technical
indicators is to track various aspects
of price action and get signals that
complement each other if you combine
indicators from a similar type of
category you may miss out on getting a
more complete price action signal or a
more complete read in the market also
using similar indicators will give what
we refer to as
multi-co-linearity this
multi-co-linearity is a statistical term
used to describe different ways to
derive the same information in simple
terms we'll be using redundant
indicators this is not a good thing for
what we've already mentioned so we don't
need to rehash that but instead let's
move into how we can avoid doing this
the first tip is a very important one
and that's to use only complementary
indicators in a perfect world if you do
just this you will never be in a
scenario where you're finding yourself
receiving redundant reads the reason is
when we say complementary indicators
we're talking about indicators that are
going to complement each other without
being redundant or providing misleading
results an example of this is always
using indicators that are going to be
from different categories remember we
talked about leading lagging and then
all the subcategories beyond there if we
make sure our indicators are from
different categories or serving purposes
from different categories we will always
be making sure that we're using
complementary indicators an example
would be say we use the moving average
convergence divergence we refer to this
in short as the macd we would use this
as a ligand indicator and in conjunction
we could use bollinger bands as a
leading indicator with its volatility
measurement that would be an example of
two complementary indicators working
together providing different reads but
to further confirm the overall goal of
predicting where we want price to go or
where we expect price to go then we have
strive to keep your charts clean this is
just so darn important it's important to
understand that more information
isn't always better we can clutter our
charts up too much and with our charts
entirely too cluttered with various
indicators we may not be able to see
what's actually going on with price
action i see a lot of newer traders do
this they jump the gun they throw on 30
indicators and then wonder why they
didn't see something that so
is clearly displayed for the rest of us
as we look at just standard price action
and that's because their charts are just
not clean we want to make sure that we
don't overdo it the right amount is
going to be the absolute minimalistic
amount in order to get us the
information that we're looking for then
we have back test back test and yes back
test this is important this means that
we're not just practicing going forward
on a demo account but we also go
backwards and see how our strategies and
how our indicators would have performed
in various market scenarios from the
past this information is invaluable and
really doesn't come at a cost a lot of
traders forsake this because they just
simply want to jump right into risking
monetary value because that's just more
excitement and more excitement generally
in their minds means more fun but guess
what guys you do that you are going to
pay a much higher learning tax
here we have a screen grab from our
article where we show three indicators
we can use in complementary fashion on
the top side we have bollinger bands
then we have the rsi and finally we have
the adx and essentially the long story
short of what we were showing in our
article which you can go ahead and take
a peek at yourself as well is that when
the bollinger bands showcased price
breaking above this could be an
indication that price is going to snap
back down as most of the time price
remains in between the two outer bands
on bollinger bands but that alone can be
a misleading signal so what we've done
here is we've confirmed it with our rsi
at the same time showing us we're
entering into overbought territory as
this is happening and then below that to
take it one step even further we wait to
show that the adx is showcasing a strong
trend and we can use this in conjunction
with price action to get ourselves a
very powerful retracement grab once
price starts coming back down
now for good measure here's an example
of redundancies and indicators if we
throw on the macd rsi and stochastics a
lot of times we're going to get reads
that just are repeating themselves and
this doesn't do us any good it just
takes up screen real estate which is
precious to us as traders we have the
rsi we have ourselves with the macd and
the stochastics all sloping downwards
there's nothing overly magical or
different happening with any one of
these and for that reason we're not
really getting ourselves any extra
information or challenging the
information that's on screen if it's all
reporting back the same stuff so this is
an example of what we do not want to see
so to sum things up indicators that all
point in the same direction isn't
necessarily the perfect combination it's
important for indicators to challenge
the reads that others are providing and
when i say others i do mean other
indicators it's important that your
indicators if they are all telling you
to buy they're coming to that read based
on different variables they're not
measuring the same exact things
redundancies and trading are not
beneficial and they're a waste of our
time good luck out there happy trading
i'll see you all very soon
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you