Why does the 1+3 indicator work so well?

Last Updated: 9. Januar 2024By

The results of the backtests in the last week speak for themselves. After receiving this question recently, I would like to explain today why the 1+3 indicator works so well. The answer may be somewhat unexpected.

It’s not just about the indicator itself. Every indicator only shows us the past. We cannot derive anything from it for the future. Actually. In addition, every indicator is only as smart as its user.

But what we can do: We take any indicator and analyze it with a certain base value and time frame. If we search long enough, we will find some pattern. But the question is always, how often does this pattern repeat itself with the indicator and can we really use it profitably.

1+3 indicator in detail The 1+3 indicator consists of a combination of indicators that act in relation to each other. Specifically, we are looking for a certain situation in the market and highlight it thanks to the programmed indicator. This allows us to filter out a lot of background noise and focus on a specific variation, maximizing its potential using this combination of candles and market conditions.

If we only use one indicator, there are too many situations that give us a signal. The more indicators we combine, the more unique the signal becomes. Of course, it is possible to overdo it. If we use 20 indicators, we may only get 0, 1, or 2 signals in a year, and then we still don’t know how or if we can trade it profitably.

For the 1+3 indicator, I use the Bull Bear Power Trend Indicator as a basis. When it gives a signal, 3 more indicators are queried. If these unanimously give the same signal within 3 trading candles, it will be displayed on the chart. This allows us to filter out a large number of false signals and get a special signal that only exists when all 4 indicators are in agreement in a short period of time.

The 3 additional indicators for me are the Ichimoku Cloud, the Choppiness Index (whether the market is moving sideways or trending), and the Vortex indicator in the advanced setting. The Vortex indicator is useful for identifying the beginning of a new trend. Alternatively, it also shows the strength of a current trend.

As you can see, this is a mix of quite different indicators. If they all say the same thing, it carries weight. But that alone won’t make us rich.

The indicator is only as smart as its user That brings us to the crux of the matter. You may have noticed this over the past few days as I fine-tuned the trading systems for each currency pair. Because just because the conglomerate of indicators shows us a green or red light, it doesn’t tell us what to trade.

Backtesting is the holy grail here. Even though backtesting – just like the real holy grail – only tells us something about the past, at least we can check which system would have been successful so far.

So it’s about recognizing a pattern when the indicator triggers. We then have to use the pattern to develop our own trading strategy. It may work on the 15-minute chart and result in a total loss on the 1-hour chart. This is also part of the backtest. But the system only needs to work in one timeframe.

Mechanical system is the key to success Rules, rules, and more rules. When I recognize a pattern and try to build a trading system from it, I look at the rules I follow to enter the trade. If I do it by intuition or not always according to the same guidelines, there is no point in starting the backtest. Then the result is worthless.

But if I have a fixed checklist that I can go through before entering the trade, I have a measurable result. The same goes for trade management, whether I adjust the stop loss. And then, personally, what I find crucial: Can I implement it in practice?

Signals on the 5-minute chart at 2 am, where I may have to enter directly in the next candle and then have to adjust the stop loss to breakeven at a CRV of 2:1, are obviously unrealistic.

That’s exactly why I plan the trading systems so that I can realistically implement them in the end. That’s where the 30-minute chart comes in. Do I have enough time to set up the trade after the signal? Is the system still profitable even if I don’t touch the stop loss? Are there enough signals over the course of a year that I can use for the backtest? Which situations – or in my case, candle sizes – are excluded and not traded?

Once I have all these points together, I can put together a nice package that results in a lucrative trading system; or has resulted in one for 2023. Of course, this does not guarantee that it will work in 2024. But the chances are good. That’s why I didn’t just test the last quarter on the 15-minute chart, but a whole year on the 30-minute chart. We have experienced all possible market phases and can put the system to the test.