Why Using Different Types of Indicators Is Important To Successful Trading

MerryDay

Well-known member
VIP
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
 
Last edited:

SaintForthigan

New member
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?
 

MerryDay

Well-known member
VIP
@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
 
Last edited:

Jonas99

Member
VIP
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?
 

codydog

Active member
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.
 

MerryDay

Well-known member
VIP
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.

That said... @Jonas99 I use both the top cycle indicators DPO and CCI.
 

Sammy800

New member
VIP
Merry Day this thread that you have posted is of critical importance. Six months ago I tried to search for this information and could not find it. I thank you for this excellent post and the many other posts that I have encountered from you on this forum.
 

Pensar

Well-known member
VIP
People have to stop focusing on the indicators and focus on set ups.....is there a conversation on set ups.....thinking set ups, and only set ups.....
@Thomas Indicators are still useful, however, as long as they are'nt overly relied on. @MerryDay's post on multicollinearity is helpful for those learning to trade using technical analysis as it teaches how to avoid relying on too many similar indicators that show the same data in slightly different ways.
I do agree though that setups are key to successful trading, as long as it incorporates risk management; if someone has the best setup yet does'nt practice risk management, they will ultimately fail. Have you thought of starting a conversation on setups? It would be very helpful, not only for new traders, but for all members here.
 

Thomas

Active member
VIP
@Thomas Indicators are still useful, however, as long as they are'nt overly relied on. @MerryDay's post on multicollinearity is helpful for those learning to trade using technical analysis as it teaches how to avoid relying on too many similar indicators that show the same data in slightly different ways.
I do agree though that setups are key to successful trading, as long as it incorporates risk management; if someone has the best setup yet does'nt practice risk management, they will ultimately fail. Have you thought of starting a conversation on setups? It would be very helpful, not only for new traders, but for all members here.
What I observed reading an indicator site is the importance is placed on what the indicator is doing, not price. Scans detecting what programmed information is released is one of the most important least discussed subjects. Scans producing ever increasing volume is another long and short, secret. That section on volume, RVOL, extreme volume really is important, a clean chart, black and white candles and the picture becomes simply clear. Bill Murray's only indicator on bottom of chart, an accumulation/distribution line with the stochastic, or volume only, taking a cluttered chart, a cluttered strategy, to simplicity. This new self taught trader I discovered uses two techniques to enter. It's my lightbulb on a lightbulb, "EXTREMELY, EXTREMELY!!," effective, don't let this book cover scare you., or the naive introduction of the video,... I watched this multiple times.
 
Last edited:

Chence27

Active member
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
After some time trading in a community with lifelong and professional traders, I learned that these guys do not use any of those indicators.

The most common tools used by these traders are market profile, volume profile, and orderflow tools like footprint charts, tape reading, the DOM and heatmaps. They don't wait for signals from lagging indicators, they understand market structure, supply and demand and orderflow, and trade with a predictive capability that is sometimes unreal.

Something to look into if you want to take your trading to the next level.
 

BBDPDC

New member
VIP
What I observed reading an indicator site is the importance is placed on what the indicator is doing, not price. Scans detecting what programmed information is released is one of the most important least discussed subjects. Scans producing ever increasing volume is another long and short, secret. That section on volume, RVOL, extreme volume really is important, a clean chart, black and white candles and the picture becomes simply clear. Bill Murray's only indicator on bottom of chart, an accumulation/distribution line with the stochastic, or volume only, taking a cluttered chart, a cluttered strategy, to simplicity. This new self taught trader I discovered uses two techniques to enter. It's my lightbulb on a lightbulb, "EXTREMELY, EXTREMELY!!," effective, don't let this book cover scare you., or the naive introduction of the video,... I watched this multiple times.
@Thomas very interested in the view you've expressed here, would you be willing to chare your chart setup please?
 

Thomas

Active member
VIP
@Thomas very interested in the view you've expressed here, would you be willing to chare your chart setup please?
I don't mind sharing, but you will be disappointed. I began using what I felt was the simplest chart, the kid in the video explained how indicators, multiple indicators were causing him to miss an entry because of conflicting signals, so slowly, he elimination one by one. My charts were simple, so, I went to volume and price. I count on the scans, then a few trendlines for entries. It doesn't interfere with the community here, but can influence how a scan is built? http://tos.mx/zu7W1qs
 
Last edited:

BBDPDC

New member
VIP
@Thomas The share is very much appreciated. You are right though, my education so far simply wouldn't allow me to trade using such simplicity, I can't see the matrix without some pretty indicators yet.
 

Thomas

Active member
VIP
@Thomas The share is very much appreciated. You are right though, my education so far simply wouldn't allow me to trade using such simplicity, I can't see the matrix without some pretty indicators yet.
You have to trade how you understand the information. Whatever works,....but if you stick with it long enough, it will arrive at simplicity.
 

Docbrown83

New member
Hi Thomas,

What are some scans that you run? Do you prefer High ADR stocks or do you go off of Stockbee’s momentum scans? Any other’s perhaps looking into?

Thanks for your time!
 

Similar threads

Top