Why Using Different Types of Indicators Is Important To Successful Trading In ThinkOrSwim

MerryDay

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This post is a condensed compilation of Dr. Rajeev Shukla’s Study of Multicollinearity of Technical Indicators

The use of multiple indicators is a fundamental basis of technical analysis. Two or more different types of indicators confirming entry greatly increase the odds of a profitable trade.

Ahhhh. But there is the rub. They must be different types of indicators. Half of all retail investors trading technical indicators have poor overall results due to using multicollinear analysis. Meaning their strategy is using multiple indicators but one or more of them are the same type of indicator.

So look at your charts. Indicators are collinear with another one if they rise, fall, make bottoms and tops in about the same locations.
g0ZVj3C.gif


Here are some of the most common indicators that investors use together under the mistaken assumption that they are confirming their entry signal:
FdWmnqd.png

The study linked at the top of this post provides a more complete list of common indicators that cannot be used together to confirm signal.

A good strategy must use two or more of these different types of indicators:
Trend indicators
Volatility indicators
Momentum indicators
Cycle indicators
Market strength indicators
Support and resistance indicators

Advantages of unrelated indicators:
• The best regression models are those in which the predictor variables each correlate highly with the dependent (outcome) variable but correlate at most only minimally with each other.
• Such a model is often called "low noise" and will be statistically robust (that is, it will predict reliably across numerous samples of variable sets drawn from the same statistical population).

Some examples of indicators when used together in certain strategies provide strong confirmation of entry:
The research referenced at the top of the post provides charts and illustrates the proper use of these groups of indicators. These are NOT the only grouping of indicators that result in strong confirmation signals. You can mix from the categories of indicators above and see which ones improve the signal for your strategy.

Traders who use technical indicators carefully and effectively can more accurately pinpoint high probability trading set-ups, increasing their odds of success in the markets. However, combining different types of indicators in a strategy results in much fewer trade possibilities, as only strong confirmations are triggered. It takes maturity, experience, confidence, and patience to wait for a strong confirmation signal. As a result, a majority of retail traders don't follow the concepts laid out here. They still have a chance of making profitable trades. The problem with trading lower probability setups is that you will have profits but you will chance incurring significant unprofitable trades.

Technical analysis deals in probabilities rather than certainties. There is no combination of indicators that will accurately predict the markets' moves 100% of the time. The point is that the use of different types of indicators has been shown to statistically significantly increase those probabilities. If your strategy isn't working for you or is working but also incurs large losses, try adding one of the above combinations to your strategy. You will make fewer trades but increase profitability.

PS: This doesn’t mean you never use same-type, non-repainting indicators. Same-type indicators using different lengths and lookbacks are useful in weeding out false signals of any one indicator. But you then still need a different type of indicator for confirmation of entry. (Multiple repainting indicators are redundant. The repainting has already eliminated all the false signals).
HTH
 
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Thanks for posting this! I've been curious about the interaction of indicators for a while, and both this and the linked study have been very helpful. I am curious though--you say that sometime, same-type indicators can be useful in filtering out false signals, so long as you've got something non-collinear to confirm it. Do you have any examples layered systems you've found to check each other?
 
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@SaintForthigan
That is not an easy question. Change the lengths in two trend indicators, plot them next to each other, and now they are better/worse at reducing false signals. Spend time reviewing the strategies throughout this forum. Many posters swear by multicollinearity to purposefully fine-tune their entry/exits. The combinations are too many list.

Example: You are having issues w/ false signals using SMI. Search the forum for SMI strategy. Review what colinear indicators are being grouped together for that type of strategy. Test the groupings that you find.

By far the most common type of indicators used collinearly in the attempt to weed out false signals are Trend and Momentum. These trend/momentum labels make it easy to see which are redundant and which can be used to strengthen good signals in your specific strategy.

HTH
 
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This post is a condensed compilation of Dr. Rajeev Shukla’s Study of Multicollinearity of Technical Indicators

The use of multiple indicators is a fundamental basis for a successful trading strategy. Two or more different types of indicators confirming entry greatly increase the odds of a profitable trade.

Ahhhh. But there is the rub. They must be different types of indicators. Half of all retail investors trading technical indicators have poor overall results due to using multicollinear analysis. Meaning their strategy is using multiple indicators but one or more of them are the same type of indicator.

So look at your charts. Indicators are collinear with another one if they rise, fall, make bottoms and tops in about the same locations.
g0ZVj3C.gif


Here are some of the most common indicators that investors use together under the mistaken assumption that they are confirming their entry signal:
FdWmnqd.png

The study linked at the top of this post provides a more complete list of common indicators that cannot be used together to confirm signal.

A good strategy must use two or more of these different types of indicators:
Trend indicators
Volatility indicators
Momentum indicators
Cycle indicators
Market strength indicators
Support and resistance indicators

Advantages of unrelated indicators:
• The best regression models are those in which the predictor variables each correlate highly with the dependent (outcome) variable but correlate at most only minimally with each other.
• Such a model is often called "low noise" and will be statistically robust (that is, it will predict reliably across numerous samples of variable sets drawn from the same statistical population).

Some examples of indicators when used together in certain strategies provide strong confirmation of entry:
The study referenced at the top of the post provides charts and illustrates the proper use of these groups of indicators. These are NOT the only grouping of indicators that result in strong confirmation signals. You can mix from the categories of indicators above and see which ones improve the signal for your strategy.

Traders who use technical indicators carefully and effectively can more accurately pinpoint high probability trading set-ups, increasing their odds of success in the markets. However, combining different types of indicators in a strategy results in much fewer trade possibilities, as only strong confirmations are triggered. It takes maturity, experience, confidence, and patience to wait for a strong confirmation signal. As a result, a majority of retail traders don't follow the concepts laid out here. They still have a chance of making profitable trades. The problem with trading lower probability setups is that you will have profits but you will chance incurring significant unprofitable trades.

Technical analysis deals in probabilities rather than certainties. There is no combination of indicators that will accurately predict the markets' moves 100% of the time. The point is that the use of different types of indicators has been shown to statistically significantly increase those probabilities. If your strategy isn't working for you or is working but also incurs large losses try adding one of the above combinations to your strategy. You will make fewer trades but increase profitability.

PS: This doesn’t mean you never use same-type indicators. Same-type indicators are useful in weeding out false signals of any one indicator. But you then still need a different type of indicator for confirmation of entry.
HTH
@MerryDay very insightful summary, thank you! What would be good examples of Cycle indicators?
 
I don't mean to intrude in your excellent thread, but can I add that when 'using' these indicators , folks should know the concept and application of the indicator as well as the math behind it. If math isnt your thing, most colleges offer classes you can audit or hire a grad student to walk you through it. (to understand math stuff). It's a whole lot cheaper than losing a bundle cause you didnt get how the squiggles or why, get painted on a chart.
 
I WHOLEHEARTEDLY agree w/ @codydog. Trend and Momentum indicators are relatively straight-forward. Up bullish, Down not.
After that, they get more complicated. The money flow indicators are more about divergences. The cycle indicators are looking at where you are in the life of the cycle. etc... These indicators cannot be plopped on a chart w/o having an understanding of the math behind them.
 
Last edited:
This post is a condensed compilation of Dr. Rajeev Shukla’s Study of Multicollinearity of Technical Indicators

The use of multiple indicators is a fundamental basis of technical analysis. Two or more different types of indicators confirming entry greatly increase the odds of a profitable trade.

Ahhhh. But there is the rub. They must be different types of indicators. Half of all retail investors trading technical indicators have poor overall results due to using multicollinear analysis. Meaning their strategy is using multiple indicators but one or more of them are the same type of indicator.

Some examples of indicators when used together in certain strategies provide strong confirmation of entry:
The research referenced at the top of the post provides charts and illustrates the proper use of these groups of indicators. These are NOT the only grouping of indicators that result in strong confirmation signals. You can mix from the categories of indicators above and see which ones improve the signal for your strategy.

MerryDay,

This is so great! What would likely be need to complete a strategy focusing on CCI zero line cross over for entries & exits with a 2 line EMA cross over as confirmation (I have BBands for good measure)? I'm assuming a volatility indicator and maybe something else. Thoughts?
 
MerryDay,

This is so great! What would likely be need to complete a strategy focusing on CCI zero line cross over for entries & exits with a 2 line EMA cross over as confirmation (I have BBands for good measure)? I'm assuming a volatility indicator and maybe something else. Thoughts?

The short answer:
Regardless of how CCI is used, chartists should use CCI in conjunction with other indicators or price analysis. Another momentum oscillator would be redundant, but On Balance Volume (OBV) or the Accumulation Distribution Line can add value to CCI signals.
~https://tinyurl.com/yc6ph4m6
 
This post is a condensed compilation of Dr. Rajeev Shukla’s Study of Multicollinearity of Technical Indicators

The use of multiple indicators is a fundamental basis of technical analysis. Two or more different types of indicators confirming entry greatly increase the odds of a profitable trade.

Ahhhh. But there is the rub. They must be different types of indicators. Half of all retail investors trading technical indicators have poor overall results due to using multicollinear analysis. Meaning their strategy is using multiple indicators but one or more of them are the same type of indicator.

So look at your charts. Indicators are collinear with another one if they rise, fall, make bottoms and tops in about the same locations.
g0ZVj3C.gif


Here are some of the most common indicators that investors use together under the mistaken assumption that they are confirming their entry signal:
FdWmnqd.png

The study linked at the top of this post provides a more complete list of common indicators that cannot be used together to confirm signal.

A good strategy must use two or more of these different types of indicators:
Trend indicators
Volatility indicators
Momentum indicators
Cycle indicators
Market strength indicators
Support and resistance indicators

Advantages of unrelated indicators:
• The best regression models are those in which the predictor variables each correlate highly with the dependent (outcome) variable but correlate at most only minimally with each other.
• Such a model is often called "low noise" and will be statistically robust (that is, it will predict reliably across numerous samples of variable sets drawn from the same statistical population).

Some examples of indicators when used together in certain strategies provide strong confirmation of entry:
The research referenced at the top of the post provides charts and illustrates the proper use of these groups of indicators. These are NOT the only grouping of indicators that result in strong confirmation signals. You can mix from the categories of indicators above and see which ones improve the signal for your strategy.

Traders who use technical indicators carefully and effectively can more accurately pinpoint high probability trading set-ups, increasing their odds of success in the markets. However, combining different types of indicators in a strategy results in much fewer trade possibilities, as only strong confirmations are triggered. It takes maturity, experience, confidence, and patience to wait for a strong confirmation signal. As a result, a majority of retail traders don't follow the concepts laid out here. They still have a chance of making profitable trades. The problem with trading lower probability setups is that you will have profits but you will chance incurring significant unprofitable trades.

Technical analysis deals in probabilities rather than certainties. There is no combination of indicators that will accurately predict the markets' moves 100% of the time. The point is that the use of different types of indicators has been shown to statistically significantly increase those probabilities. If your strategy isn't working for you or is working but also incurs large losses, try adding one of the above combinations to your strategy. You will make fewer trades but increase profitability.

PS: This doesn’t mean you never use same-type, non-repainting indicators. Same-type indicators are useful in weeding out false signals of any one indicator. But you then still need a different type of indicator for confirmation of entry. (Multiple repainting indicators are redundant. The repainting has already eliminated all the false signals).
HTH
Thank you @MerryDay for this post! I am a brand new trader and was overwhelmed and confused with all of the different type of indicators and how to set up a trading plan including the above combination of indicators along with price action, support and resistance and volume. I am so glad I found this page!!

*Just a quick question, what indicator categories would the VIP Premium Indicators: AMM 2, BTD, Take Profit and VTR fall under or what should I use with ?

The AMM2 is a combo of RSI, Bollinger Bands and Fast MACD...so what other indicators if any would you add to this?
The BTD is based on the Synthetic VIX which estimates Volatility so I'm assuming a Volatility Indicator based on Shukla's study?
The Take Profit is again based the Synthetic VIX but under TP V1.0 it says it's an oscillator so Trend Indicator or again Volatility based on Shukla's study?
The VTR is also based on Volatility so again a Volatility Indicator based on Shukla's study?

Are there favorites of yours that you group with AMM2 or BTD or TP or VTR?

Thank you.
 
Thank you @MerryDay for this post! I am a brand new trader and was overwhelmed and confused with all of the different type of indicators and how to set up a trading plan including the above combination of indicators along with price action, support and resistance and volume. I am so glad I found this page!!

*Just a quick question, what indicator categories would the VIP Premium Indicators: AMM 2, BTD, Take Profit and VTR fall under or what should I use with ?

The AMM2 is a combo of RSI, Bollinger Bands and Fast MACD...so what other indicators if any would you add to this?
The BTD is based on the Synthetic VIX which estimates Volatility so I'm assuming a Volatility Indicator based on Shukla's study?
The Take Profit is again based the Synthetic VIX but under TP V1.0 it says it's an oscillator so Trend Indicator or again Volatility based on Shukla's study?
The VTR is also based on Volatility so again a Volatility Indicator based on Shukla's study?

Are there favorites of yours that you group with AMM2 or BTD or TP or VTR?

Thank you.
AMM2 would fit in the support and resistance group.
BTD, TP are counter-trend studies

A great chart setup to start with or add your favorite indicators to: https://usethinkscript.com/threads/how-to-read-and-trade-the-uts-tape-reader-chart-setup.12134/
 
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If I could add in the one area almost everyone overlooks but, in my opinion and experience, is arguably the most important... market/trading psychology. All those pretty charts, lines, and indicators are driven by human (for the most part) interactions and emotions. Most indicators work because they're self-fulfilling in the sense that we all know what should happen when X and Y line up or Z crosses over this or that line, so the humans behind the trades essentially make it happen somewhat subconsciously. For instance, what makes a value define support or resistance? There's no physical limit, just an imaginary line that we assign and agree upon. So a price gets to the imaginary line and everyone waits... then reacts in tandem when it breaks or bounces, amplifying the movement. Understanding the hows and whys of market reactions can provide a lot of the hidden info that you should be reading into those indicators. My $0.02.
 
This post is a condensed compilation of Dr. Rajeev Shukla’s Study of Multicollinearity of Technical Indicators

The use of multiple indicators is a fundamental basis of technical analysis. Two or more different types of indicators confirming entry greatly increase the odds of a profitable trade.

Ahhhh. But there is the rub. They must be different types of indicators. Half of all retail investors trading technical indicators have poor overall results due to using multicollinear analysis. Meaning their strategy is using multiple indicators but one or more of them are the same type of indicator.

So look at your charts. Indicators are collinear with another one if they rise, fall, make bottoms and tops in about the same locations.
g0ZVj3C.gif


Here are some of the most common indicators that investors use together under the mistaken assumption that they are confirming their entry signal:
FdWmnqd.png

The study linked at the top of this post provides a more complete list of common indicators that cannot be used together to confirm signal.

A good strategy must use two or more of these different types of indicators:
Trend indicators
Volatility indicators
Momentum indicators
Cycle indicators
Market strength indicators
Support and resistance indicators

Advantages of unrelated indicators:
• The best regression models are those in which the predictor variables each correlate highly with the dependent (outcome) variable but correlate at most only minimally with each other.
• Such a model is often called "low noise" and will be statistically robust (that is, it will predict reliably across numerous samples of variable sets drawn from the same statistical population).

Some examples of indicators when used together in certain strategies provide strong confirmation of entry:
The research referenced at the top of the post provides charts and illustrates the proper use of these groups of indicators. These are NOT the only grouping of indicators that result in strong confirmation signals. You can mix from the categories of indicators above and see which ones improve the signal for your strategy.

Traders who use technical indicators carefully and effectively can more accurately pinpoint high probability trading set-ups, increasing their odds of success in the markets. However, combining different types of indicators in a strategy results in much fewer trade possibilities, as only strong confirmations are triggered. It takes maturity, experience, confidence, and patience to wait for a strong confirmation signal. As a result, a majority of retail traders don't follow the concepts laid out here. They still have a chance of making profitable trades. The problem with trading lower probability setups is that you will have profits but you will chance incurring significant unprofitable trades.

Technical analysis deals in probabilities rather than certainties. There is no combination of indicators that will accurately predict the markets' moves 100% of the time. The point is that the use of different types of indicators has been shown to statistically significantly increase those probabilities. If your strategy isn't working for you or is working but also incurs large losses, try adding one of the above combinations to your strategy. You will make fewer trades but increase profitability.

PS: This doesn’t mean you never use same-type, non-repainting indicators. Same-type indicators are useful in weeding out false signals of any one indicator. But you then still need a different type of indicator for confirmation of entry. (Multiple repainting indicators are redundant. The repainting has already eliminated all the false signals).
HTH
This is an incorrect analysis of Multicolinearity. Multicolinearity only is an issue when you fit a model that estimates parameters.
 

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