Combining Indicators Without Double Counting Signals

More indicators does not mean more confirmation. If you require RSI above 50, MACD positive, and Stochastic above 50 before buying, you haven't added three independent filters—you've added three momentum indicators that move together approximately 85% of the time. This correlation means your "triple confirmation" provides little more confidence than a single indicator. The result: false security that leads to either over-trading (signals look strong because all indicators agree) or under-trading (waiting for redundant confirmation that rarely diverges).

What Double Counting Actually Means (Why This Matters)

Double counting occurs when multiple indicators measure the same underlying phenomenon. When two indicators are highly correlated, requiring both to confirm adds almost no independent information.

The practical chain: Same input data → Similar calculations → Correlated outputs → Redundant signals

Consider two common momentum oscillators:

• RSI: Measures ratio of average gains to average losses over N periods
• Stochastic: Measures current close relative to the high-low range over N periods

Both measure momentum. When a stock is rising, both tend to rise. When momentum fades, both tend to fall. Correlation between 14-day RSI and 14-day Stochastic typically exceeds 0.80 during trending markets.

The point is: Requiring both RSI and Stochastic confirmation is functionally equivalent to requiring one indicator to confirm twice. You've added complexity without adding information.

Indicator Categories: Understanding What Each Measures

Technical indicators fall into distinct categories based on what they measure:

The fundamental principle: Combine indicators from different categories. Avoid stacking indicators from the same category.

Correlation Within Categories: The Data

Momentum Oscillators (High Correlation)

Using daily data on the S&P 500 (2010-2023):

When RSI is overbought (above 70), Stochastic reads overbought (above 80) approximately 88% of the time. These are not independent confirmations.

Trend Indicators (Moderate Correlation)

Trend indicators show moderate correlation because they respond to the same underlying price direction, though at different speeds.

Cross-Category (Low Correlation)

The durable lesson: Cross-category indicators provide genuinely independent information. When RSI and ATR agree on a signal, you have two different types of confirmation. When RSI and Stochastic agree, you have one type of confirmation measured twice.

Building Non-Redundant Indicator Systems

Effective Combination Framework

Choose one indicator from each category that matters for your strategy:

Example System for Trend Following:

1. Trend filter: Price above 50-day SMA
2. Momentum trigger: RSI crosses above 50
3. Volume confirmation: OBV rising (20-day slope positive)
4. Volatility context: ATR below 20-day average (contracting volatility)

These four conditions measure four different things. Agreement across all four is genuinely more informative than any single condition.

Ineffective Combination (Redundant)

Common mistake:

1. RSI above 50
2. Stochastic above 50
3. MACD positive
4. CCI above 0

All four are momentum oscillators. If one triggers, the others almost certainly trigger simultaneously. You've created four-way redundancy that feels like strong confirmation but isn't.

Worked Example: Evaluating a Trade Setup

Stock XYZ Analysis:

Redundancy assessment:

• Three momentum indicators (RSI, Stochastic, MACD): high correlation, effectively one signal
• One trend indicator (price vs. SMA): independent
• One volatility indicator (ATR): independent
• One volume indicator (OBV): independent

Actual independent confirmations: 4 (trend, momentum-group, volatility, volume) Apparent confirmations: 6 (counting each indicator)

The practical point: This setup has four-way independent confirmation, not six-way. The momentum cluster should count as one signal, not three.

Weighted Confirmation: A Better Framework

Rather than requiring all indicators to agree, weight confirmations by category:

Scoring System Example

Total score: 4 out of 5 possible

Decision rule:

• Score 4-5: Full position size
• Score 3: Half position size
• Score 0-2: No trade

Why this matters: This framework explicitly acknowledges that adding a second momentum indicator doesn't increase the score. You get one point for momentum, regardless of how many momentum oscillators agree.

Common Double-Counting Mistakes

Mistake 1: Multiple Moving Averages as Separate Signals

The error: "I need the 20 SMA above the 50 SMA, and the 50 SMA above the 200 SMA—that's two confirmations."

The reality: If the 20 is above the 50 and the 50 is above the 200, all three measure the same uptrend. This is one trend confirmation, not two.

Mistake 2: Oscillator Confirmation Across Timeframes

The error: "Daily RSI and weekly RSI both above 50—double confirmation."

The reality: Weekly RSI is a smoothed version of daily RSI. They're highly correlated (typically 0.75+). Multi-timeframe analysis is valid, but calling it independent confirmation overstates the evidence.

Mistake 3: Price Pattern Plus Indicator Based on Same Pattern

The error: "The breakout above $50 is confirmed by MACD turning positive."

The reality: MACD turned positive because price broke out. The indicator is measuring the same event. This isn't confirmation—it's description.

Building Genuinely Independent Confirmation

For a buy signal to have true multi-factor confirmation:

1. Include different data sources: Price (trend), price momentum (oscillators), volume, volatility
2. Include different timeframes: Daily trend, weekly momentum, monthly support level
3. Include different market perspectives: Single stock setup, sector strength, market breadth

Example: Four-Factor Independent System

Correlation between these four factors: approximately 0.25-0.40 (genuinely independent)

When all four align, you have real confirmation from four different perspectives. When RSI, Stochastic, MACD, and CCI all align, you have one perspective measured four times.

Limitations and Risks

Even non-redundant systems have weaknesses:

1. Regime dependence: The relationship between indicators changes in different market environments. Volume may not matter in low-liquidity periods.

2. Overfitting: Requiring too many conditions produces few signals, and those signals may not persist out-of-sample.

3. Lag accumulation: Each indicator adds lag. By the time all four categories confirm, the optimal entry may have passed.

4. False independence: Some cross-category relationships exist. RSI extremes correlate with ATR spikes during panics.

Next Steps

1. List all indicators in your current system—categorize each as trend, momentum, volatility, volume, or breadth
2. Identify redundancies—if you have two or more from the same category, you're double counting
3. Keep one per category—choose the indicator you understand best from each category
4. Test correlation—plot two indicators together; if they move in lockstep, they're redundant
5. Reduce complexity—a three-indicator system with independent factors outperforms a six-indicator system with redundancies

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Related: Momentum Oscillators: RSI, Stochastics, and MACD | Volume Analysis and On-Balance Volume | Scanning Tools for Technical Setups