3 Indicators Can Be Too Much



Technical analysis has been with us for many years. It has developed significantly and today there is a huge variety to choose from. That’s great! But it doesn’t mean you should use them all at once. It could hurt your trading.

Not only has research advanced, but it has also become very accessible. Any charting provider, whether given for free or state of the art professional charts, have a vast amount of indicators available to the traders. You may think that by loading many of them, you’ll find the perfect confluence. You have better chances to produce modern art in your chart.

By using too many indicators, your messy chart won’t be useful. This is the case of “analysis paralysis“. Over analysis can hide obvious opportunities that you could spot if there weren’t so many lines on the chart.

Worse yet, a messy chart can yield wrong decisions. The eagerness to see opportunities might make you believe that you see some opportunity when there’s nothing there.

There is no quick solution and no magic trick. It is up to every trader to develop his trading system, test it, apply it and stick to it.

A trading system just cannot be made using too many indicators. Using one indicator can be perfectly sufficient.

Using two indicators is more common and helps traders with verification.

Added a third indicator? At this spot, you are entering the confusion zone. If you can handle three without getting confused, continue to have full control, go for it.

More than 3? That can be too much…

Here are some indicators, and how you can use them with care:

  • Support and resistance lines are important. Using Fibonacci? Great. But consider removing some of the lines after adding those Fibs.
  • Oscillators can be very useful. One type is good enough.
  • Moving averages crossing each other indicate a trend change. But also here, too many moving averages make your graph move in no direction.
  • Using Elliott Wave Analysis? Nice. But mixing it with another method can be messy.

I think you get my point. How many indicators do you use?

Further reading: 5 points on when to go Pro




About

Yohay Elam – Founder, Writer and Editor

I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me.

Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

3 Comments

  1. Shahar says:

    One at the most.
    I use them to quantify patterns and measure movements – but NOT as chart-decorations that sometimes happen to coincide with trade signals.

  2. L. C. Chong says:

    I think that we should try to avoid multicollinearity amid indicators.

    The use of four different indicators all derived from the same series of closing prices to confirm each other is a perfect example. Multicollinearity is a serious problem because collinear variables contribute redundant information and can cause other variables to appear to be less important than they really are.

    The best way to quickly determine if an indicator is collinear with another one is to chart it. Make sure you have enough data on the chart to get a good indication. If they basically rise and fall in about the same areas, the odds are that they are collinear and you should just use one of them.

    By doing this, we will be able to reduce number of indicators in the chart.

  3. Yohay says:

    Thanks for your comments!

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