Two of the most popular forms of technical trading are using indicators and price action trading. When using indicators, traders are generally looking to execute a trade based on an indicator signal. For example, if MACD turns bearish, traders will execute a sell trade. Or, if the RSI indicator is oversold, traders will execute a buy trade.
Similarly, when trading naked price action, traders are looking for certain signals to execute a trade. For example, if price forms a bullish engulfing candle, they will execute a buy trade. Similarly, if the trader identifies a bearish pin bar, they will execute a sell trade. While both these strategies are effective, combing the two approaches can lead to better opportunities and stronger.
When combing indicator readings with price action signals for trade entries traders can use whichever indicators and price action setups they like. Let’s take a look at a few examples and discuss why they are so powerful.
Engulfing Candles With RSI
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In the chart above you can see an example of a bearish engulfing candle, combined with bearish RSI divergence at a double top. So, as price is testing the double top, the trader will note that the RSI indicator is showing clear bearish divergence (weaker indicator signal than the last time price was at the level). This suggests that the market is vulnerable to a reversal lower.
Price tests the level and then we see a strong reversal with price printing a bearish engulfing candle. This tells us that there has been an acute shift in supply and demand at the level. This alerts us to the potential for a deeper move lower. The presence of the bearish engulfing candle at the double top resistance level with bearish RSI divergence is a strong set of criteria for placing a short trade. This would have nicely captured the reversal lower.
Inside Bar Breakouts With MACD
In the chart above you can see an example of an inside bar breakout with bullish MACD signal. The trader would have noted that the MACD indicator turned bullish at the site of the vertical red line. With a bullish signal in play, the trader would be looking for long opportunities. In the highlighted section you can see an inside bar breakout setup noted. So, at the point that the inside bars were forming, the trader would note the contraction in momentum and the likelihood that, in line with the bullish MACD signal, the market would eventually break higher, allowing the trader to enter a long trade as price moved above the mother candle. This is a great way to trade with the trend and allows the trader to quickly capture a fresh burst of momentum as the trend resumes.
Pin Bars With Stochastics
In the chart above you can see an example of a bearish pin bar at a double top with overbought stochastics. The stochastics indicator measures momentum in the market and identifies when momentum is overstretched and likely to see a price reversal.
So, with price testing the double top level, the trader would have noted that the stochastics was in overbought territory. This means that price was vulnerable to a reversal lower. The formation of the bearish pin bar would then confirm the trade there and offer an entry point. Pin bars, similar to engulfing candles, represent a strong shift in the underlying supply-demand balance. These too can be a powerful trade signal.
Hopefully, now you have a better idea of how you can combine indicator readings with price action setups to identify powerful trade entries. Combing the two approaches means that you are looking for extra confirmation in the market before placing a trade. Using a method like this that requires more than one criterion for entry can be a great way to improve your trading and increase your chances of success.