Moving Averages, Fibonacci and Fractals
- A pattern seen through the average between highs and lows of a pair’s price is called a moving average
- The Fibonacci tool is a method used by traders to pinpoint great entry and exit points for trades
- A fractal in forex is a recurring trend that can easily be seen on the chart
Does Adding Price Indicators Confuse You?
Do you also feel that using price indicators on your charts can quickly become confusing? Or do you notice that the more indicators you add, the more you notice paralysis of analysis?
This process is logical and normal. Price indicators offer a lot of useful information, but adding too many can become counter-productive.
This article explains how to balance your analysis by choosing a moderate dose of indicators. We give a practical example of how that can be done with 3 indicators: the moving averages, the Fibonacci tool, and the Fractal indicator.
Price Indicators: Avoiding the Trap of Paralysis of Analysis
At first, glance, adding more price indicators makes sense. Traders receive more information about the price chart of choice. In turn, this extra information should provide better decisions. Who would not want that?
Unfortunately, the reality is different for many traders. Adding more price indicators does lead to more information, but also to opposite signals and opposing views.
For instance, price action could be reaching a Fibonacci support level while breaking a band for a bearish breakout. Which advice do you follow?
Of course, traders can avoid taking any decisions and stay out of the market. But if all the indicators are indicating the opposite, then there would be no trades left.
Simply said, adding 100 indicators will not make your trading decisions easier. It will only clutter your analysis and charts.
Price Indicators: Finding The Right Balance
How do you solve it? There are two aspects that can help:
- Do not over clutter the charts with too many indicators.
- Only use indicators that have a specific role in your analysis and trading decisions.
Choosing The Right Number Of Indicators
Each and every trader will have their own ideal number. The ideas mentioned here are general recommendations.
But often traders tend to use a few indicators, ranging from 2-3 on the low side to 5-10 on the higher side.
Most traders agree that using more than 10 or 20 indicators starts to become unproductive. The costs start to outweigh the benefits because traders become confused by the overload of information.
Assign Roles To The Indicators
Each indicator should have a specific role when using them. It makes no sense to add 10 indicators that help you determine the trend. One or a few indicators should be enough for that particular purpose.
By using an indicator for one or two purposes only, we make sure that the information from the indicator is used within a concrete and clear trading plan. This helps you avoid getting distracted when indicators have less importance.
Traders can assign many roles but most agree on this division:
- Trend indicator
- Momentum indicator
- Support and resistance indicator
- Divergence indicator
- Pattern indicator
- Breakout indicator
Price Indicators: Combining Indicators For Your Trading Plan
Price indicators should have a clear role in any trading plan. Otherwise, the indicator is just taking up space and making you feel confused.
The advantage of using the 6 roles (see paragraph above) is that you know why the price indicator is on your chart. It should have a clear part in your trading plan.
Each category can have 1, 2 or even 3 indicators. Keep in mind that one indicator can be used for multiple roles as well.
Let’s explain each indicator category.
This indicator is used to determine the direction of the trend.
- Usually, 1 indicator is enough. But you can use two or three. For instance, moving averages are often the most used indicator. But traders often also add trend channels to their charts.
- This indicator shows the speed of price action
- Traders can use a moving average too (short one), a parabolic, or bands.
Support And Resistance Indicator
- This indicator shows key support and resistance levels.
- Traders can use Fibonacci, Murrey Math, pivot points, Ichimoku.
- This indicator compares price action with price momentum. If the two do not match, then a divergence pattern emerges and this indicates a slow down of the trend.
- Traders can use the MACD, Awesome Oscillator, RSI.
- This indicator helps traders identify charts and wave patterns.
- Traders can use moving averages, trend lines, the zigzag indicator, etc.
- This indicator helps traders to spot moments when the price is making a breakout.
- Traders can use the Fractal indicator, trend lines, bands, and envelopes.
As you can see, there are many indicator combinations possible. But over combining them could easily become a distraction.
For instance, imagine a trading plan that uses 10 different indicators for identifying breakouts. One could imagine that there would be way too many breakout setups appearing on the chart.
Or what if we had 8 divergence indicators? You can quickly see how using too many indicators would clutter the chart and make it difficult to see the price itself.
Now that we know the most important roles, let’s review an example where we combine moving averages, Fibonacci, and Fractals just for the sake of explanation.
Price Indicators: Combining MAs, Fibonacci, And Fractals
The moving average is a particularly useful indicator because it can serve well in multiple roles and instances.
In this practical example, we will use the moving averages for determining the trend. Let’s use the Fibonacci numbers 21 ema and 144 ema for that.
The 21 ema indicates the short-term trend whereas the 144 ema is the long-term trend:
- Uptrend = price is above the 21 ema which is above the 144 ema.
- Downtrend = price is below the 21 ema which is below the 144 ema.
For this part, we can use the moving average again. But we need a faster-moving average than with the trend. For instance, a 5 ema close could work well or an HMA 20.
- Bullish momentum = bullish angle of 5 ema.
- Bearish momentum = bearish angle of 5 ema.
Support And Resistance
Now it is time to use the Fibonacci level together with the usual tops and bottoms. Fibonacci levels are important when the market is trending. But if the market is in a range, then the Fib tool is not important. In that case, tops and bottoms are the most important.
- Uptrend: Fibonacci levels act as support.
- Downtrend: Fibonacci levels act as resistance.
- Range: avoiding using Fibs and focus on tops and bottoms instead.
In this example, we can use the standard Awesome Oscillator (AO) indicator for spotting divergence patterns.
In this example, we will use moving averages as well for pattern recognition. The main aspect to review is price versus the 21 emas:
- Price action in the 21 ema = chart pattern.
- Price action outside of the 21 ema= momentum.
In this example, we will use the Fractal indicator as a breakout indicator:
- A bullish breakout = price action breaking and/or closing above the Fractal resistance.
- A bearish breakout = price action breaking and/or closing below the Fractal support.
Examples of How To Use The Price Indicators
Price patterns repeat but each and every moment is unique. So the examples provided here just meant to support the ideas mentioned earlier in this article. Keep in mind that traders need to build their own trading plan and practice that sufficiently first.
Let’s review the image below where we mix the 6 roles and use the 4 indicators mentioned in the previous paragraph, which are the moving averages, Fibonacci tool, the Fractal indicator, and the AO.
Let’s start with the trend: on the left side, the trend is down because the 21 ema is below the 144 ema. On the right side, the trend is up because the 21 ema is above the 144 ema.
The momentum indicator moves up and down often. It is useful to keep an eye on the angle of the 5 ema when considering trades. If the momentum is against the prevailing trend, it could be wise to wait for the momentum to be aligned. So bearish angled 5 ema in a downtrend and bullish angled 5 ema in an uptrend.
The support and resistance tool is the Fibonacci. There is a trend so we placed the Fib tool on the price swings with the trend. The Fib levels act as a resistance in a downtrend and as a support in an uptrend.
The divergence AO indicator is indicating divergence between the bottoms and tops. This means that the trend is running out of steam.
The patterns created by the moving averages are indicating several chart and wave patterns.
Finally, the Fractal breakout indicator is showing moments when the trend is able to continue and when the trend is in trouble:
- The blue boxes indicate breakouts below the support in the downtrend.
- The red boxes indicate breakouts above the resistance in the uptrend.
- The orange boxes indicate the reversal above the resistance after a divergence pattern (purple line).
- The green boxes indicate the reversal below the support after a divergence pattern (purple line).
What Did We Learn from this Guide on Moving Averages, Fibonacci, and Fractals?
Hopefully, this example shows you how indicators can be combined for making trading decisions – but without paralysis of analysis and confusion. We showed traders:
- How and why avoiding the paralysis of analysis when using price indicators is key
- Finding the right balance with price indicators
- How to combine indicators in your trading plan
- How to use MAs, Fibonacci, and Fractals
- Other examples of how to use the price indicators