The Rule Of Multiple Techniques

Last year I wrote about the importance of combining indicators to help increase the odds of finding a winning trade. I think this one of the most important concepts a trader needs to understand so I am posting my commentary from last year again for those of you who may have missed it.

Today I'd like to talk about the power of combining indicators to increase the accuracy of getting a winning trade.. Years ago there was a book written by a man named Arthur Sklarew entitled "Techniques Of A Professional Commodity Chart Analyst". In his book he spoke about a rule that he named "The Rule Of Multiple Techniques"
I'll quote a few lines from his book.. " It has been my experience that the accuracy of any technical price forecast can be improved greatly by the application of a principle that I call the Rule of Multiple Techniques.. The rule requires that the chart technician not rely solely on one single technical signal or indicator, but look for confirmation from other technical indicators. The more Technical indicators that confirm each other, the better the chance of an accurate forecast. The logic behind this rule is that if individual time-proven techniques tend to be right most of the time, a combination of several such techniques that confirm each other will tend to be right more frequently"
In the above chart we have a daily price chart of BJ.. In the lower panels we have the OBV (on balance volume) indicator, and underneath that we have the 14 day stochastics.. These two indicators on their own sometimes work and at other times cause us to lose money over and over again.. But what would happen if we combined the two indicators, would that help increase the odds of a winning trade? You bet! Notice in August BJ made a new low for the move.. The stochastics were in the oversold area indicating a buy..Do we just blindly buy... NO! Lets check other indicators...Notice that the OBV line in August did NOT make a new low, it was diverging... So by combining the two indicators ( an oversold Stochastic and a very bullish OBV line) our odds of a winning trade are greatly improved..The same setup happened in November and a huge up move followed...
Now just because you combine indicators doesn't mean you will be right 100% of the time...What it does mean is that you will increase your odds of capturing a winning trade.. You don't have to use just 2 indicators, you can use 3 or 4 of your favorite indicators and simply just wait for at least 2 of them to confirm each other...obviously the more indicators in agreement with each other the better.. The trick is to make sure the indicators you are using are NOT related...Don't use stochastics and an RSI...They are basically the same...You want to combine different indicators like momentum tools with seasonality, or accumulation distribution tools with intermarket relationships...etc...I hope this helps..This is one of the most valuable things you can do to improve your trading.