Now that you understand how some of the most common chart indicators work, it’s time to get to some examples.
Let’s put some of these indicators together and see how their trading indications appear. In an ideal world, we might choose only one of these indications and trade solely on the information provided by that indicator.
The problem is that we DO NOT LIVE IN A PERFECT WORLD, and each of these indicators has its imperfections.
That is why many traders use several indicators to “filter” one another.
They may have three separate indicators, and they will not trade unless all three indicators offer the same signal.
Bollinger Bands + Stochastic
On the 4-hour chart of EUR/USD, we can see Bollinger bands and Stochastic.
Since the market appears to range or move horizontally, we should watch for Bollinger bounces.
Check Bollinger bands and Stochastic for sell indications.
EUR/USD rises to the top of the band, which is usually a resistance level.
At the same time, Stochastic reached the overbought area, indicating that the price will decline soon.
What happened after that?
If you take a short trade, EUR/USD will fall by about 300 pips, and you will make a big profit.
Later, the price touched the bottom of the band, which is usually used as a support level.
This implies that the pair can rise from there. We have to go long if Stochastic is in the oversold zone.
If you take the trade you will make almost 400 pips! Not bad at all!
RSI + MACD
Here’s another example, this time with RSI and MACD.
When the RSI enters overbought territory and sends a sell signal, MACD quickly follows with a downward crossing, also showing a sell signal. As you can see, the price dropped from there. Later, the RSI fell into the oversold zone, signaling a buy signal. A few hours later, MACD crossed to the upside, which is also a buy signal.
From there, the price continues to increase.
You may have observed that RSI shows ahead of MACD in this case.
Due to the variety of qualities and magic formulas for technical indicators, some provide very early warning while others are slightly delayed.
You will learn more about this in a future lesson.
