Combining Technical Indicators: Bollinger Bands / GET Stochastic / ADX
By Zak Mir of Zaks-ta.com*
Posted: Jan 16, 2009
We all dream of the perfect indicator, one that would be the "idiot" camera as far as trading is concerned. This would get us in on a move at the bottom and get us out at the top. However, the cruel reality is that some indicators work very well some of the time, and others work moderately well all of the time.
However, the indicator for all seasons, and especially all conditions, is one that is by definition hard to find. The problem is that, unless you find the Holy Grail, the day you start putting your top indicator into practice with real money could be the day when this indicator has its biggest drawdown, taking you back to square one, or worse.
One solution is to combine different indicators, ones that individually do not provide the whole answer, but together cover most market conditions. For instance, Bollinger Bands work fantastically in range-bound markets -- those that exist most of the time. However, when you combine these bands with the Average Directional Movement (ADX) Indicator or the GET Stochastic, you may have the added dimension of being able to know when to play a market from the long side or short side as a market hits the top or bottom of the Bollinger Band.
In the case of the Dow daily chart, you can see that we have the chart from the second half of July. My trend indicator is the ADX and Positive Directional Indicator, a pairing that I find particularly helpful. The "turning point" indicator is a combination of the Dow hitting then failing at the Bollinger Band lines (as happened at the beginning of November) and the crossing of the Advanced GET Stochastic lines shown in blue and red.
The idea would be that you use the crossovers of the stochastic indicator to buy (blue K% moves above red D%) or to sell (D% falls below K%). However, you only follow sell crosses when the ADX says "sell" -- the positive directional indicator falls below the ADX -- and only look to buy when the positive directional indicator has crossed positively above the ADX.
In the case of the Dow, it can be seen how, since the middle of September, there has been a sell signal in the ADX window, giving off the message that one should be selling rallies.
The best part of this "system" is that it is an attempt at technical analysis that allows you to go by the "trend is your friend" mantra.
*Reprinted (and modified) with permission from Zak Mir of Zaks-ta.com
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