Combination of Technical Indicators

Many traders say that simplicity is important, and using a single indicator is adequate as long as you are very good at it. It maybe true that simplicity is important but I don't believe that using one indicator for any trading is adequate, and in fact you can become potential victims of unreliability of that indicator.

Why multiple indicators can be more reliable than using a single indicator? In order to tackle this question, let us evaluate drawbacks of each indicator.

Moving average convergence divergence (MACD) is a lagging indicator which means that the movement of the indicator is always behind the current movement of the chart. Therefore traders who are heavily relying on MACD tend to wait longer time to find their setup position. Thus each moment of the day there are too many good opportunities are wasted because of the MACD move too slow than the current movement of the chart. In some cases Moving Average Convergence Divergence can also create certain degree of frustration for waiting the chart to move base on the indicator's guidance.

Relative Strength Index (RSI) is a leading indicator, which means that it predict the future ahead of the current movement of the chart. Despite of its credibility so called "leading indicator", the effectiveness of its application is not as good as MACD. And in fact RSI can bring more fatal mistakes than any of the lagging indicators. Let's take an example of each trading day, oversold and overbought positions are frequently happening and furthermore these conditions may be permanent and not coming back as expected. Therefore if you are heavily rely on RSI, then you are going to lose your money fast. This is because RSI signal the movement is too early, when the reality is the chart may not move back to its current position. Better to be lagging then leading it is less risky.

The Bollinger bands indictor work very similar to pivot point/Fibonacci retracement, where it predicts the boundary of fluctuation using the band. It consist of three bands which is the upper, middle (moving average), and the lower band. I am not going to explain further the application of it because I already did some of them in the past. Instead I am going to elaborate more of the potential drawbacks of the Bollinger bands. Even though the Bollinger bands can show where is the boundary of fluctuation, but the reality is, the chart frequently penetrated the bands boundary either temporary or permanently. Whatever the conditions are whether it is temporary or permanent, it will trigger certain doubts over your decision to make buy or sell. And when doubts start growing more and more, you will probably losing your guts and exit the market with at least certain amount of losses.

Now I am not going to explain all of the technical indicators because there are too many of them. Just to sum up everything, all technical indicators simply have their own drawbacks which can sometimes overwrite their advantages. So by combining technical indicators which has the ability to complement each other's advantage, is essential to reduce the gap of its drawbacks. An example is MACD can possibly combine with the Bollinger bands where the first will determine the direction of the trend and the second help you to determine the stopping point. Or maybe you can add up another indicator call slow stochastic in order to cope with the most current direction of the trade. Now with these three indicators you are solving your problems by moving in the right direction (MACD) with the most current (slow stochastic) movement and at the expected distance of stopping point (bollinger band).