How Many Indicators Should I Use

Technical indicators are trading tools which can be very uselful if they are used properly. Indicators use various mathematical calculations to visualize certain characteristics of past and current price movements and volume changes. There is a large number of indicators which makes it very difficult to decide which ones to use.  Novice chartists often put too many indicators on their charts with often redundant information. This also makes it difficult to make a quick decision. Indicators can be grouped in for different groups:

• Trend indicators - they meaure the direction and strenght of the trend
• Momentum indicators - they tell us about the speed at which prices change
• Volume indicators - they are based on calculations which tells how much volume changes with price       movements
• Volatility indicators - helps to determine the volatility, the higher the volatility the riskier the security

This groups measure different characteristics of the security. It's important to use indicators from different indicator groups when you develope your trading strategy. Several indicators from the same group would only give redundant information and is also called multicollinearity. If two different indicators give very similar signals you know that they belong to the same indicator group. The table below helps to select indicators from different groups: