How to combine the best Indicators?
Many analysts use a combination of different timeframes to assess the trend’s momentum, compare divergences happening when the price is vulnerable to reversal, and conclude the movement direction for the nearest term. At the same time, a combination of several moving averages on the chart might show the same pattern when it’s easy to determine the trend direction or at least identify the likelihood of any given action. It’s understood that such a trading approach does not work on short-term charts like 5- or 15-minutes as there’s nothing to compare with on the shorter side. For the best efficiency, a swing trading strategy would be much more effective, taking into the account four-hourly chart as the essential timeframe to trade on.
Traders might develop their own algorithm to calculate relations between different periods, as well as compare moving averages with different settings. However, that background has already been applied in a mathematical formula, which is aimed to determine the trend’s momentum. Bill Williams created many popular technical tools; one of them was even called with his name, Williams %R oscillator. This trading strategy is based on another result of William’s work - Awesome Oscillator. The indicator takes tow exponential moving averages as the fundamental relation. Simple moving averages are not reviewed in the formula as they lack smoothing in their rates, while the number of fake spikes and whipsaws is large compared to EMAs. Two periods are used in Awesome’s formula, 5- and 34-bars. Such a mixture of ultra-short-term period and preferably a medium-term length allows the indicator to produce the change in average prices, showing the market’s momentum as a result. The main idea of Awesome Oscillator is that it does the tough job for traders, comparing several periods and indicating the momentum, which allows determining further price action. One more important feature of the oscillator is that it does not mention close or high/low prices, but concentrates on average midpoints for every single bar.
How to use combined indicators?
The second indicator of this trading strategy is MACD. That’s a well-known and popular trend indicator, although it’s a bot slow and lagging. The main advantage of MACD is that it shows the current trend, confirming or denying the direction noticed in Awesome Oscillator. As many technical tools, MACD works better in combination with other indicators. One of the combinations is to work in the pair with Awesome Oscillator. The only change we do here is to shift the default parameters of MACD. We set 5,7,4 for MACD instead of 12,26,9. That change allows us getting faster response from the MACD and get more trading signals.
Entry conditions are simple. We need both indicators to point out a strong trend. Therefore, they both must be above the Zero Line for long entries and below the Zero Line for short positions. There is also a strong signal by Awesome Oscillator when it crosses the Zero Level from below (for long entries) and from above (for shorts). If those moments come together with confirmation by MACD, then we pull the trigger. Otherwise, if MACD denies the change of the trend’s momentum, then we ignore the cross.
If you like this strategy, you might also be interested in this Heiken Ashi Forex
Exit conditions are usually different depending on the currency pair. As long as the only timeframe to watch for this strategy is H4, we would set different take-profit orders for different pairs. For instance, EUR/USD might have a distance of 40 pips, while GBP/USD could move 100 pips with the same signal. Another feature of this trading system is that it suggests multiple entries on the same pair. Therefore, traders should remember about the money management rules and avoid risking with too much trading volume in one single position. Stop-loss orders are also dependant on any given asset, and it would be better to keep them tight at the same level in case of multiple entries. An example of the Awesome and MACD Forex Trading system in action is shown below.