Using Complementary Indicators

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To avoid the problems associated with multicollinearity, traders should select indicators that work well with, or complement, each other without providing redundant results. This can be achieved by applying different types of indicators to a chart. A trader could use one momentum and one trend indicator; for example, a stochastic oscillator (a momentum indicator) and an Average Directional Index, or ADX (a trend indicator). The below picture shows a chart with both of these indicators applied. Note how the indicators provide different information. Since each provides a different interpretation of market conditions, one may be used to confirm the other.