How to Combine Technical Indicators (Pairing/Combining RSI, MACD, etc.) -- with David Moadel
hello and welcome to looking at the markets with David Modell you guys give
me and gals give me such great comments in the comments section of my videos I
appreciate that please keep the comments and questions coming here's a great
question from koryo mato thank you for the question by the way you says good
video David thank you for that have you ever done videos about using indicators
to complement each other I believe he's referring to combinations
of technical indicators indicators that work well in a team again great question
thank you for that and I will try to answer that in this video I was thinking
about using this topic anyway though regarding combining indicators how to
combine them which ones to combine so let's take a look at that I mean a lot
of you guys and gals out there are combining indicators maybe two of them
maybe three of them for example you might have a moving average you might
have RSI up there you might add the volume which I'm going to do right now
by the way I'm looking at trading view right now and there's the volume so you
might even have two or three indicators at once that's okay anything more than
three usually gets a bit cluttered might be a little bit confusing for a lot of
people but let's say you want to use two or three indicators what's a good combo
what's a good combination and what's my thought process behind combining them so
let's get into that I've written this document here so here we go which
combination of technical indicators to use here's my thought process it might
not be as useful to combine indicators which are essentially expressing the
same thing like for example you know so I've got indicators that don't really
express the same thing I've got the excuse me I've got the RSI
which is an overbought oversold indicator I've got a moving average
which is a momentum or trend indicator and I've got the volume bars which
indicate the volume of course okay so they're all expressing three different
types of information I'll explain it okay so yeah it might not be as useful
to combine combined indicators which are essentially expressing the same thing
for example the stochastic indicator and the RSI basically serve the same
function because they're both oscillating indicators meaning they go
up and down within a range all right so here's the RSI you can see it's within a
range okay and it goes up and down and up and down within that range unlike a
moving average which theoretically could just keep going up and up forever if the
price kept going up or it could keep going down and down forever all right
it's not range-bound it's not just going up and down within a range
so whereas RSI stochastics so on and so far it's CCI their oscillators alright
so RSI and let's say the stochastic indicator they both basically serve the
same function they're both oscillators they go up and down within a range and
they indicate overbought or expensive and oversold or cheap conditions in the
price so that's why I wouldn't necessarily put stochastics and RSI or
CCI I wouldn't put more than two of more than even one of those on the same chart
probably because they serve the same function
alright so therefore I would usually prefer to combine indicators from
different categories so that they're not redundant or serving the same purpose
and therefore unnecessary alright so I might pick one from one category one
from another if you like to use two indicators then you can select two out
of the three listed below if you like to use three indicators then you can select
one each category so you can select one from
all three categories in other words all right so here are the three types the
three categories again if you want to indicators you might pick one from
category one one from category two or whatever just pick you know if you have
to if you want to then pick from two of these categories if you want three
indicators then pick one from all three of these categories one from each all
right it's like a menu when you go to the restaurant all right
so category one we just talked about which are oscillators or you might call
them overbought oversold indicators that includes as we just talked about RSI
stochastics indicator CCI that would also include MACD Bollinger Bands
Keltner channels and so on alright so basically if it bounces up and down
between two boundaries then it would probably fit into that category
including Bollinger Bands by the way which they you know that is overbought
oversold and also bounces between two lines two boundaries ok Keltner channels
and so on alright so you might pick one from that so yeah so you have an
overbought oversold indicator and that can help to give you an entry and exit
point all right category 2 would be trend or
momentum indicators that would include moving averages and we just talked about
that there's a moving average here like for example this one this is just a I
just put a simple moving average up there and when it's trending upwards
that's probably a good thing because I do want to buy something that's trending
upwards generally ok maybe not at the moment maybe not in the short term but
in the long term if it's trending upwards
that's usually what I want to buy I don't want to catch I don't want to
catch a falling knife I don't want to buy something that's overall generally
trending downwards alright so that's just one example so yeah this
category would include moving averages the copic curve parabolic SAR each
omocha cloud etc but also the RSI stochastics CCI MACD etc can also serve
this purpose of a trend or momentum indicator by watching the direction of
the lines to determine the trend alright so to clarify that point we'll
look at RSI again you know some people might actually use the RSI line as a
momentum indicator so for example if the RSI line is training upwards that could
serve the same purpose as a moving average in terms of at least telling you
the overall direction you know of the price action so really you can use you
could just use one indicator if you wanted to you could use the RSI both as
an overbought oversold indicator you know with the for example the the 30
level being oversold and the 70 level being overbought for the default
settings on the RS RSI and you could also use it as the trend or momentum
indicator if you just watch the direction of the line all right so RSI
and all those other ones here that I mentioned you know let's say the RSI
stochastics CCI MACD and so on those could also be in the trend or momentum
indicator category in addition to being in the overbought oversold category all
right so they could serve dual purposes and
then the third category is volume indicators that would obviously include
volume bars which are usually found at the bottom of the chart alright so there
you go volume bars right other volume indicators would be V whap
obv which is unbound on balance volume money flow and so on alright so yeah so
again it's like a menu you know you could pick two you could pick all three
but you might not want to you know if you're using the again
the RSI I don't really see a lot of purpose you know to put the stochastic
up there as well I mean you can you know that could serve a purpose but I tend to
want to pick from different categories for different purposes alright so
example you could use a simple movie you know this is the same example from here
you could use a simple moving average so you can focus on stocks that are
generally trending upwards long term and pair that up with the RSI like I did to
show you when to get into the trade like when it's oversold and when to exit the
trade like when it's over bought in addition to that you could also add the
volume bars like I did at the bottom of the charts so that you can filter out
low volume fake-out moves alright so a lot of people add that third element
there the volume indicator like the volume bars so that might be another
filter you might say okay I like to buy when it price actions generally trending
upwards which the moving average could tell me or the RSI line can tell you as
well and I like to buy when it's you know at the bottom here when it when
it's oversold according to the RSI 30 and then a sell when it's over bought
according to the RSI 70 level for example but you might have another
filter where you say I'm not going to do anything even if those conditions are
true I'm not going to do anything if the volume is really really low for example
because that could be a fake-out could be a low conviction low volume move and
so that's not necessarily when you want to get in if there's not a lot of
conviction because then the price action could turn right around at any moment
so that could be a third filter for you and a third category alright I hope this
was helpful to you just to give you some insight into how I think about pairing
up combinations of technical indicators and if you want some more help with this
I do offer coaching for the coaching you can email me anytime at David Modell at
gmail.com it's right down there okay and if you like this video please give it a
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