The Composite Index combines the RSI and the SMAs (simple moving averages) to tell the direction of the trend. This guide will talk about how the indicator works and how you can apply it as a forex strategy for buying and selling currency pairs.
What is the Composite Index Indicator?
The Composite Index uses a fast and a slow RSI along with the 3 SMAs. The SMA’s default periods are 3, 13, and 33. But you can adjust it according to your settings.
The indicator doesn’t show the RSI; it only shows the 3 SMAs. By looking at the crossovers, you can enter the trade.
Composite Index Indicator Strategy
To trade with the Composite Index, you must look for the crossovers. The 33-period SMA (yellow) is the longest and slowly moves with the trend. All the SMAs must align before you can take any positions.
If the 3-period SMA crosses above 13 and 33, it signifies a potential uptrend. Here, you can enter long positions.
Conversely, if the 3-period SMA dips below 13 and 33, it’s a sign of a potential downtrend, and you may take short positions.
Another way to trade the indicator is with the RSI. As mentioned earlier, the indicator uses the two RSIs in its calculation but doesn’t show them on the chart. So, you can add the RSI separately to get further confirmation of where the trend is heading.
The good thing is you can use the Composite Index Indicator at any timeframe. However, it’s best to look for the overall trend in a longer timeframe and then enter the trade in a short timeframe.
Buy Signal
- The 3-period SMA must cross above the 13 and 33-period SMAs.
- Wait for the price to continue going up and then enter the trade.
- Place a stop-loss at the recent low.
- Set take-profit at the recent high or exit the trade when the 3-period SMA dips below the 13-period.
Sell Signal
- The 3-period SMA must cross below the 13 and 33-period SMAs.
- Wait for the price to continue going down and then enter the trade.
- Place a stop-loss at the recent high.
- Set take-profit at the recent low or exit the trade when the 3-period SMA exceeds the 13-period.
Composite Index Indicator Pros & Cons
Like all other indicators, the Composite Index Indicator has pros and cons. Let’s see what they are.
Pros
- The Composite Index uses 3 SMAs for confluences.
- The indicator follows the price, presenting exact entry and exit points.
Cons
- You may have to apply the RSI or any other momentum indicator for further signal confirmation.
- The indicator may not work properly on shorter timeframes.
Conclusion
The Composite Index is a momentum-based indicator that combines the RSI and the SMA. By locating the crossovers, you can find the potential entry and exit points. You can always practice trading on a forex demo account to begin with to improve your trading skills and build up your confidence.
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