Technical Indicators: How Many Are Too Many?
Education - Milan Cutkovic | 15 Aug 2019
Many traders ask themselves: "How many indicators should I have on my charts?"
There is no clear answer to that question, as it depends on the trading style and the strategy. However, an overload of technical indicators can lead to confusion and mess a trading strategy – which may otherwise work – completely up.
The reason for that: Having too many indicators on the chart, a trader may receive conflicting signals which can cause him/her to become nervous and unsure about whether following the strategy is the right decision. Furthermore, there is no point having multiple indicators that show the same or similar information on the chart.
While there is no definitive answer to the question how many indicators a trader should use, there might be some guidelines that could help in making that decision.
1. Are you a beginner or intermediate or experienced trader?
Beginners might find indicators more useful, as it helps them filter out signals. More experienced traders might find that they do not require as many indicators, as they are already skilled on reading price action and know which indicators are suitable for their strategy and which not.
2. Are you a short-term or long-term trader?
If you are a scalper and trading on the 5-minute chart, having many indicators on it would make it more difficult because of the frequency of the signals you receive. A trader utilizing the Daily chart has more time to think about the different signals and analyze the chart in detail.
3. What are your preferences?
Think about what you feel most comfortable with – a clean chart with only candlesticks or perhaps 1-2 indicators on it or a chart with a variety of indicators on it. If you feel overwhelmed by a large number of indicators, you might find finding a strategy that centers around trading price action more suitable.
The most important lesson
Regardless of how many indicators you wish to use – you should avoid having too many indicators that essentially show the same or very similar information. The four main indicator groups are:
- Trend indicators – indicators that help you identify a trend, such as Moving Averages and Parabolic SAR.
- Momentum indicators – Oscillating indicators that help traders identify overbought and oversold conditions. Examples are RSI, Stochastics and CCI.
- Volume indicators – indicators which show the volume behind a particular price movement. For FX spot, the data will not be as reliable as volume data for e.g. Futures because the FX market is decentralized. However, some traders still find it useful to use. Examples are Money Flow Index and the Force Index.
- Volatility indicators – indicators that assist traders in understanding the price range. Examples are Bollinger Bands and ATR.
We have a variety of indicators available in our MT4 platform – to test them, feel free to open a Demo account with us.
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
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