Last Updated on 20 September, 2020 by Samuelsson

Trading indicators are integral parts of most swing trading strategies. And with so many to choose from, it might be hard to decide which ones to combine for maximum efficiency.

The best combination of trading indicators for swing trading depends on the type of trading strategy you trade. However, one universal truth is that it’s generally better to use trading indicators from varying indicator categories, rather than relying on several indicators from the same category.

In this guide to combining trading indicators for swing trading, we’ll look at what you need to know about the markets and trading strategy construction to create an effective mix of trading indicators!

Before we start off discussing how to combine trading indicators, we’ll just touch on a very common mistake that’s made by many beginners.

Indicator Redundancy: Using Too Many Indicators At Once

Best Indicator Combination

Best Indicator Combination

When you start out as a new trader, you’re subjected to a whole world of new trading indicators such as the RSI, ADX, and Stochastics, just to name a few.

Inundated in all new information, many beginners choose to fit in as many trading indicators as possible into their chart windows.

While this might seem like a good idea at first glance, it usually makes trading much harder. Instead of focusing on and specializing in one indicator, you’ll have so many indicators to keep track of that you’ll never become really proficient in interpreting any of them.

In addition, your workspace quickly becomes cluttered, which makes it all very hard to overlook.

Many Trading Indicators Provide Similar Information

When it comes to indicator redundancy, one of the biggest issues is that traders tend to use multiple indicators that show roughly the same thing. It could be that they are using the RSI, Stochastics, and MACD in their analysis, which all belong to the same category of trading indicators. This means that they’ll show roughly the same readings, and provide the same information.

RSI + MACD + Stochastics

RSI + MACD + Stochastics

Now, there is no issue in using these three trading indicators at the same time, except that it may become a little hard to overlook. Even though they are very similar, there will be many occasions when a signal only is triggered in one of the indicators. Those times you may benefit from having the other two as validation, meaning that you want the signal to occur across all three indicators.

While this approach may work in some cases, the issue here is that you would make much better use of your screen space if you decided to go for two other indicator types instead. Having three indicators that rely on different formulas and show different things about the market simply is more valuable than having three indicators that show roughly the same information.

So how should you choose which indicators to include for your swing trading?

We’ll start off answering this question by first covering the main trading indicator categories.

The Main Indicator Categories

Before we may discuss how to best pick an indicator combination, we have to look at the categories we may choose from.

So, without further discussion, here are the five main categories:

  • Trend Indicators
  • Volatility Indicators
  • Momentum Indicators
  • Volume Indicators
  • Market sentiment indicators

Trend Indicators

Moving Average ADX and DI

Moving Average ADX and DI

Trend indicators attempt to determine the direction of the current market trend. In most scenarios, this is highly relevant information that will have a huge impact on the performance of many strategies.

Here are some of the most widely used trend indicators:

Moving averages: A moving average simple is an average of the price which is plotted on the chart. The moving average line is then used to define the direction of the market trend. This is usually done by either looking at the slope of the line, or whether the price is above or below the average. Our complete guide to moving averages covers this in greater depth.

DMI: The DMI indicator consists of +DMI which measures positive price gain, and -DMI which measures negative price gains. The indicator is normally used by looking at whether the +DMI trades above or below the -DMI. If it trades above, we have a positive trend, and if it trades below the trend is negative.

ADX: ADX measures trend strength irrespective of the trend direction. It’s calculated as the absolute difference between +DMI and -DMI. You may read more about ADX in our complete guide to the ADX indicator.

Volatility Indicators

ADX and Price Channels

ADX and Price Channels

Volatility indicators are indicators that give a measure of the current volatility levels in the market. This could be useful to estimate things like stop-loss placements or at what price level to take a breakout.

Some of the most common volatility indicators include

Price Channels: There are many price channel indicators that will adjust the width of the channel in response to volatility changes. Some of these include Bollinger bands, Donchian channels, and Keltner bands.

ADX: Although falling under the category of trend indicators, the ADX indicator also could be said to measure the volatility of the market as well.

Momentum Indicators

Momentum Indicators

Momentum Indicators

Momentum indicators attempt to define the speed at which the security is moving relative to previous price moves. Most momentum indicators are oscillators, meaning that they move between extreme values in a predetermined range.

Some of the most common momentum indicators include:

RSI: This is a very common trading indicator that measures the speed of the momentum changes, as well as recent trading strength. It’s often used to find overbought and oversold market conditions.

Stochastics: This indicator is quite similar to the RSI, but uses a somewhat different formula that also includes the high and low of a bar.

MACD: MACD is another popular momentum indicator. It uses two moving averages, one shorter and one longer, and turns them into an oscillator by calculating the distance between the two. Then as the short term trend deviates from the long term trend, we get higher readings and the other way around.

Market Sentiment Indicators

This is a really interesting and somewhat different indicator category. Market sentiment indicators measure the current market sentiment and give clues about if market participants are bearish or bullish on the market. Usually, this involves looking at things like the number of advancing and falling stocks on an exchange, or similar measures.

Here are some of the most common market sentiment indicators:

Put/call ratio: This indicator compares the number of outstanding put options to call options to figure out the current market sentiment levels.

Advance/Decline Ratio (ADR)The ADR simply compares the number of advancing stocks to declining stocks on an exchange, to get a broader view of the market sentiment.

Our complete guide to market sentiment indicators deals with this indicator category in greater depth!

How You Should Combine Trading Indicators

Combine Trading Indicators

Combine Trading Indicators

When combining trading indicators we aim to get as much relevant information from the market as possible, to make good and informed decisions about entering or exiting trades.

The best way to get as much relevant information as you can is to use trading indicators that measure different things.

This means that you should consider picking one trading indicator from each category presented above, rather than having two or more from the same category.

So, for instance, a good combination when it comes to finding mean reversion trades could be the following:

  1. A momentum indicator, like the RSI that signals when the market has become overbought and oversold.
  2. A trend filter, to ensure that we trade in the direction of the prevailing market trend. ADX is a strong contendor.
  3. A market sentiment indicator that ensures that the overall sentiment is either bullish or bearish, depending on your strategy.

Below is an example of such a setup:

Strategies for Mean Reversion

Strategies for Mean Reversion

Another combination that might suit a trend follower better could be:

  1. A price channel indicator where the upper and lower bands mark a breakout level.
  2. A volatility filter, to ensure that the breakout above or below the price channel line was made with a certain amount of force. ADX once again is a good choice here!
  3. A trend filter, to ensure that the long term trend is in the direction of the breakout. A common and useful indicator would be a long term moving average.

Below we have put together this very combination:

Indicator Combination for Trend Following

Indicator Combination for Trend Following

Another Good Combination of Trading Indicators For Swing Trading

Having covered the meat of the article, we just wanted to present one more example of a good trading indicator combination. This is a combination we use a lot ourselves, and that we hope you’ll find valuable.

Now, you’ll notice that the example below uses no more more than two indicators. This is because we find that it often doesn’t take more than so to construct a great trading system. And while you certainly could add more indicators to the list, keeping things simple is a great way of keeping curve fitting at bay.

RSI and ADX

This is a quite powerful indicator combination for swing trading stocks. Usually you couple a low RSI reading with a high ADX reading. which signals that the market not only is oversold but has gotten into oversold territory with force. And since mean reversion tends to work better when the moves are sudden and fast, the ADX filter should help a great deal here.

Note that the best period settings for the RSI usually is somewhere around 2-5, and that’s what we use here too.

Below we see how an oversold RSI signal (the lower indicator) together with an ADX reading above 40 resulted in a positive market move.

Best Indicator Combination

Best Indicator Combination

Conclusion

The best indicator combination for swing trading depends on the type of trading strategy you’re trading.

However, a universal rule that applies to all trading styles and types is that you should strive for simplicity and not clutter your trading workspace with countless trading indicators.

If you do, you run the risk of getting inundated in numbers that might not even be relevant to your trading strategy, which inevitably will have a negative impact on trading performance.

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