Now that you know how some of the most common chart indicators work, you’re ready to get down and dirty with some examples.
Better yet, let’s combine some of these indicators and see how their trade signals pan out.
In a perfect world, we could take just one of these indicators and trade strictly by what that indicator told us.
The problem is that we DON’T live in a perfect world, and each of these indicators has imperfections.
That is why many traders combine different indicators together so that they can “screen” each other.
They might have 3 different indicators and they won’t trade unless all 3 indicators give them the same signal.
In this first example, we’ve got the Bollinger bands and the Stochastic on EUR/USD’s 4-hour chart.
Since the market seems to be ranging or moving sideways, we’d better watch out for the Bollinger bounce.
Check out that those sell signals from the Bollinger bands and the Stochastic.
EUR/USD climbed until the top of the band, which usually acts as a resistance level.
At the same time, the Stochastic reached the overbought area, suggesting that the price could drop down soon.
And what happened next?
EUR/USD fell by around 300 pips and you would’ve made a hefty profit if you took that short trade.
Later on, the price made contact with the bottom of the band, which usually serves as a support level.
This means that the pair could bounce up from there. With the Stochastic in the oversold area, it means we should go long.
If you took that trade, you would have gotten around 400 pips! Not bad!
Here’s another example, with the RSI and the MACD this time.
When the RSI reached the overbought area and gave a sell signal, the MACD soon followed with a downward crossover, which is also a sell signal. And, as you can see, the price did move downhill from there.
Hooray for multiple indicators!
Later on, the RSI dipped to the oversold region and gave a buy signal. A few hours after, the MACD made an upward crossover, which is also a buy signal.
From there, the price made a steady climb. More pips for us, yipee!
You probably noticed in this example that the RSI gives signals ahead of the MACD.
Because of the various properties and magic formulas for the technical indicators, some really do give early signals while others are a bit delayed.
You’ll learn more about this in sixth grade.
As you continue your journey as a trader, you will discover which indicators work best for you.
We can tell you that we like using MACD, the Stochastic, and RSI, but you might have a different preference.
Every trader out there has tried to find the “magic combination” of indicators that will give them the right signals all the time, but the truth is that there is no such thing.
We urge you to study each indicator on its own until you know the tendencies of how it behaves relative to price movement, and then come up with your own combination that YOU understand and that fits your trading style.
Later on, we will show you an example of a system that combines different indicators to give you an idea of how they can complement each other.