Top 10 Indicator-Based Trading Strategies
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Combining Indicator Based Strategies
Each indicator based strategy should, at the very least, incorporate market structure as a key part of its core strategy. This means that you are looking to see if a recent new swing low or swing high has been achieved.
For example, if the indicator of your choice is giving you a Sell signal, yet market structure has show that a new swing high was just made, you need to be looking for the very strong possibility of an almost imminent reversal, of the sellers trend to happen (At very least a retracement is happening, so you would be waiting to see if the trend is over or preparing to continue.)
In combination with your main indicator, other indicators, like moving averages & fibonnaci retracement levels, can be very heplful in dressing up a chart, for a more visual representation of where price is going and where it may exaust or find support.
If any terms are confusing to you, please check out our Trading Glossary of Terms
Top Down Analysis
It is good to note that many indicators were originally,designed for the Daily charts, so they can be used very effectively on the daily chart.
You can then use their indications, as your guide, on the lower timeframes.
For example, if when looking at the daily chart, the price is above 50 on the RSI, the MACD line is above the zero line and signal line, plus price is above the 50 period moving average, plus price has jumped above the upper bollinger band, it would be a very good idea to favour buy opportunities on the lower timeframes, as they will have much more momentum in there favor and less resistance overall.
Moving Average Crossover Strategy
This strategy involves using two different moving averages. Buy signals are generated when the short-term moving average crosses above the long-term moving average, and sell signals occur when the short-term moving average crosses below the long-term moving average.
For example, if a 50-day moving average crosses above a 200-day moving average, traders might consider it a buy signal indicating a potential uptrend.
Standard Settings:
There are no standard settings for moving averages, but some common ones are the 20, 50, 100 and 200.
Some traders like to only use fibonacci sequence numbers for moving averages as well. These would be 3, 5, 8, 13, 21, 34, 55, 144, 233, 377, 610, 987...
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Relative Strength Index (RSI) Strategy
RSI is a momentum oscillator that measures overbought and oversold conditions. Buy signals occur when RSI crosses above a certain threshold (e.g., 30), indicating upward momentum. Sell signals occur when RSI crosses below another threshold (e.g., 70), suggesting potential downward momentum.
For instance, if the RSI crosses above 70 and starts declining, traders might consider it a sell signal indicating potential downward price movement.
Standard Settings
The RSI was originally designed to work on a 14 day period, so 14 is the standard setting, however any setting can be used. The 28 period can be more helpful for fast moving timeframes, but ultimatley the setting is up to the user.
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Moving Average Convergence Divergence (MACD) Strategy
The MACD is a trend-following momentum indicator. Buy signals occur when the MACD line crosses above the signal line, indicating potential upward momentum. Sell signals occur when the MACD line crosses below the signal line, suggesting potential downward momentum.
For example, if the MACD line crosses above the signal line while both are above the zero line, traders might consider it a buy signal indicating possible upward trend continuation.
Standard Settings:
The standard setting for MACD, is 12 (FAST LINE), 26 (SLOW LINE) and 9 (SIGNAL LINE). Feel free to try out different options, to find what works best for your strategy.
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Bollinger Bands Strategy
Bollinger Bands consist of a middle line and two standard deviation bands. Buy signals can occur when the price touches the lower band and then starts to rise, indicating potential price reversal. Sell signals may occur when the price touches the upper band and then starts to decline, suggesting potential price reversal.
Suppose the price of a stock touches the lower Bollinger Band and then begins to rise. Traders might see this as a buy signal indicating a possible price bounce.
Standard Settings:
The standard setting for the Bollinger Bands indicator, is 20 for the period and 2.0 for the standard deviation.
20 is the period of the middle lines moving average, which is a "Simple Moving Average".
If you increase the deviation, the bands will expand more and if you decrease it, they will contract more.
Feel free to try out different options, to find what works best for your strategy.
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Stochastic Oscillator Strategy
The Stochastic Oscillator identifies overbought and oversold conditions. Buy signals occur when the %K line crosses above the %D line, indicating upward momentum. Sell signals occur when the %K line crosses below the %D line, indicating downward momentum.
If the %K line crosses above the %D line while both are in the oversold range, traders might consider it a buy signal indicating potential price rebound.
Standard Settings:
- %K Periods: 14
- This is the number of time periods used in the stochastic calculation. It's the primary line of the Stochastic Oscillator, often represented as a solid line.
- %D Periods: 3
- This represents the moving average of the %K. It's used to generate signals and is often represented as a dotted or dashed line.
- Slowing Periods: 3
- This value is used to smooth the %K line, leading to a less sensitive line that will generate fewer signals.
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Average True Range (ATR) Strategy
ATR measures market volatility. Higher ATR values suggest larger price movements. Traders use ATR to set stop-loss levels and identify potential breakout points.
For instance, if the ATR value for a currency pair suddenly increases, traders might anticipate higher volatility and adjust their trading strategy accordingly.
Standard Settings:
The standard period for the Average True Range (ATR) is 14 periods. This means that when the ATR is applied to a daily chart, it would typically consider the last 14 days of price data.
Similarly, if it's applied to an hourly chart, it would consider the last 14 hours.
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Ichimoku Cloud Strategy
The Ichimoku Cloud provides information about trend direction, support/resistance, and potential buy/sell signals. Price interactions with the cloud, Tenkan-sen, and Kijun-sen can help traders make trading decisions.
Imagine a stock's price breaking above the Ichimoku cloud, crossing the Tenkan-sen and Kijun-sen. Traders might view this as a buy signal, indicating a potential uptrend.
Standard Settings:
- Tenkan-sen (Conversion Line): 9 periods
- Kijun-sen (Base Line): 26 periods
- Senkou Span A (Leading Span A): (Tenkan-sen + Kijun-sen) / 2, plotted 26 periods ahead
- Senkou Span B (Leading Span B): (Highest High + Lowest Low) / 2 for the past 52 periods, plotted 26 periods ahead
- Chikou Span (Lagging Span): Current closing price, plotted 26 periods behind
These settings are based on the original version of the indicator, as developed by Goichi Hosoda in Japan. The numbers were supposedly chosen based on the number of working days in a week, month, and two months in the Japanese calendar. However, traders might adjust these settings to better fit their specific trading strategy or the particular characteristics of the asset they are trading.
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Fibonacci Retracement Strategy
Fibonacci retracement levels help identify potential support and resistance levels and price corrections. Traders use these levels to determine potential entry and exit points.
If a stock's price retraces to a Fibonacci level (e.g., 50% or 61.8%) after a strong upward movement, traders might consider it a buy signal, anticipating a potential price bounce.
Standard Settings:
The standard settings used in fibonacci retracement tools are the 23.6%,38.2%, 61.8% and 78.6% retracement zones. It is not recommended to change these. Some people include the 50% zone, although it is not a fibonacci number, but is the halfway point between the 38.2% and 61.8% zones.
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Parabolic SAR(Stop And Reverse) Strategy
The Parabolic SAR helps identify potential trend reversals. Dots above or below price candles suggest buy or sell signals, respectively. Switching sides of the dots indicates potential changes in trend direction.
If the Parabolic SAR dots switch from being above to below price candles, traders might consider it a sell signal indicating a potential reversal from an uptrend to a downtrend.
Standard Settings:
The standard settings for the Parabolic SAR is Step: 0.02 and Maximum: 0.2 . Like most indicators, these setting should be played with, to find out what suits your strategies needs. To allow more room between the SAR dots and price, simply decrease the step to 0.01 and observe the difference.
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Average Directional Index (ADX) Strategy
ADX measures trend strength. High ADX values suggest a strong trend. Traders might consider entering trades in the direction of the trend indicated by ADX.
For example, if the ADX is above a certain threshold (e.g., 25) and rising, traders might see it as a signal of a strong trend and consider entering trades aligned with that trend.
Standard Settings:
The standard settings for the ADX indicator is 12 periods.
The ADX is used to measure trend strength and doesn't determine trend direction. It's often accompanied by two other lines: the Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI), which can help in assessing the direction of the trend. All three are usually calculated using the same period, often the standard 14-period setting.
As always, traders may adjust this setting based on their strategy or the characteristics of the asset they are trading.
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