Best Indicators for Day Trading

Technical indicators are a key part of technical analysis, which is the study of securities and market psychology to find patterns that can be used to generate buy and sell signals. In this list, you’ll learn about seven technical indicators that can help you make better trading decisions. Each indicator has its own strengths and weaknesses, so it’s important to understand how they work before using them in your trading strategy.

Moving Averages (MA)

The first indicator on the list is moving averages. Moving averages are a type of trend following indicator that smooth out price action to help you better identify the direction of the market. There are two types of moving averages, simple and exponential. Simple moving averages give equal weight to each period, while exponential moving averages give more weight to recent periods. Moving averages can be used to generate buy and sell signals when the market is trending, and they can also be used as support and resistance levels when the market is trading in a range.

Bollinger Bands (BB)

The second indicator on the list is Bollinger Bands. Bollinger Bands are another type of trend following indicator that uses standard deviation to measure volatility. Bollinger Bands consist of a middle band, which is a simple moving average, and two upper and lower bands. The distance between the middle band and the upper or lower band indicates the level of volatility in the market. When the market is volatile, the Bollinger Bands will widen, and when the market is quiet, they will narrow. Bollinger Bands can be used to generate buy and sell signals when the market is trending, and they can also be used as support and resistance levels when the market is trading in a range.

Sell when price hits top band, buy when price hits bottom band. Of course, no strategy is 100% accurate and you should always use stop losses. Bollinger bands are best used in ranging environments.

Moving Average Convergence Divergence (MACD)

The third indicator on the list is MACD. MACD stands for Moving Average Convergence Divergence. MACD is a momentum oscillator that consists of two exponential moving averages and a histogram. The histogram measures the difference between the two moving averages. MACD is used to identify momentum, and it can also be used to generate buy and sell signals when the market is trending.

When the faster MA (blue line) crosses the slower MA (red line) it indicates a possible trend reversal. Once it crosses the histogram at the bottom, it gives you confluence to use alongside your other technical analysis skills to potentially long the asset. Same is true in reverse.

Relative Strength Index (RSI)

The fourth indicator on the list is RSI. RSI stands for Relative Strength Index. RSI is a momentum oscillator that measures the speed and change of price movements. RSI is used to identify overbought and oversold conditions in the market, and it can also be used to generate buy and sell signals when the market is trending.

Stochastics Relative Strength Index (ScRSI)

The fifth indicator on the list is stochastics. Stochastics are a type of momentum oscillator that measure the relationship between an asset’s closing price and its price range over a period of time. Stochastics are used to identify overbought and oversold conditions in the market, and they can also be used to generate buy and sell signals when the market is trending.

The Stochastic RSI indicator is similar to the traditional RSI, but reacts much faster to price. It is used more regularly for short time frame trading strategies since there is less ‘lag’ than the RSI.

Average True Range (ATR)

The sixth indicator on the list is ATR. ATR stands for Average True Range. ATR is a volatility indicator that measures the distance between an asset’s high and low price over a period of time. ATR is used to measure volatility, and it can also be used as a support or resistance level when the market is trading in a range.

On Balance Volume (OBV)

On balance volume, or OBV for short, is a technical indicator that measures the flow of volume in and out of a security. If the OBV is increasing, it means that more volume is flowing into the security, indicating buying pressure. If the OBV is decreasing, it means that more volume is flowing out of the security, indicating selling pressure. Many traders who use OBV will be less interested in its absolute value but rather its rate of change to help generate trade ideas. If the OBV is moving notably in one direction, it could give credence to the idea that a big move could be coming in that direction in price. In general, rising OBV indicates bullish momentum while falling OBV indicates bearish momentum. However, it’s important to keep in mind that OBV can sometimes diverge from price action, so it’s best used in conjunction with other technical indicators.

As you can see in the chart above, we can see an OBV divergence, meaning that the volume indicator is moving up, while price is moving down. This usually indicates that the volume increase will help drive the price higher- which it did. The OBV is a preferred indicator by trading professionals as it is a clear volume indicator that blocks out noise. It is best used on higher time frames to identify a true trend direction or reversal.

Indicators can be a valuable tool in your trading arsenal, but it’s important to remember that they should not be the only thing you rely on. Combining indicators with your own analysis and intuition is often the best course of action. If you want to learn more about how to use these tools or are looking for some help incorporating them into your strategy, our team is here to assist. Do you have any questions about the indicators we talked about today?

images credit: moneycontrol.com, babypips.com, forexwithanedge.com