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The global online trading market is a $10.21 billion industry as of 2022 and is projected to grow to $13.3 billion by 2026.
These growing figures suggest that more traders buy and sell financial instruments online. Among the tools these individuals use are trading indicators that can help traders analyse trends and detect buy and sell signals.
What technical indicators can you use for day trading? How do you use them? Which ones can help you spot overbought or oversold markets?
This article discusses the various trading indicators and explains what you must consider before using them for day trading.
Trading indicators provide statistics to help you measure market conditions and forecast potential economic and financial trends. Taurex has helpful information about trading indicators, platforms, and other topics about trading.
Trading Indicators Explained
If you are trading forex, stocks, or commodities or want to start trading in any of these markets, you can use technical analysis as part of your trading strategy.
Technical analysis involves using trading indicators, which are mathematical calculations you plot on a price chart to help you identify trends and signals within the market.
Indicators come in different types, like leading and lagging indicators. Leading indicators are signals that help you predict future price movements. In contrast, lagging indicators help you analyse momentum and past trends.
“Should I Use Indicators in Day Trading?”
If you’re a day trader, technical indicators can be vital tools to help you predict daily market movements and volume. Without such tools, generating money within short time frames, such as in forex trading, can be challenging.
As a trader, consider using tools that can present market data and price activity to help you develop a profitable analysis.
Is Technical Analysis Reliable?
When you perform technical analysis, you read various signals and graph patterns to understand market sentiment.
Various studies suggest that such analyses may be effective but have a varied range of success. Additionally, the accuracy of technical analysis still needs to be determined.
Consider using a suite of technical indicators and tools with other techniques like fundamental analysis to improve your reading reliability.
Information Offered by Intraday Trading Indicators
Trading indicators can provide at least four kinds of information that can benefit you as a trader:
- The trend’s direction to help determine price movement
- The investment market’s lack of or current momentum
- The asset’s profit potential due to volatility
- The market’s popularity according to volume
You can use these essential pointers to help you assess the market conditions and make more informed decisions on positioning your trade.
How Many Technical Analysis Tools Are There?
Market technicians occasionally create new technical analysis tools and improve existing ones. This innovative and adaptive process gives traders access to dozens of technical analysis tools, including chart patterns and indicators.
Are Technical Indicators Completely Necessary for Day Trading?
Technical indicators are instruments that help with your trading activities but do not necessarily guarantee results, so using them is still entirely up to you.
Although some day traders do not utilise technical indicators, successful ones typically use these tools to have a better chance of profiting.
If you’re a long-term investor, technical indicators can help you predict an asset’s future price movements and make more money in stocks or other financial markets.
Traders and chartists performing technical analysis use various indicators, patterns, and oscillators (mechanisms involving periodic fluctuation) to help identify entry and exit signals.
Some indicators use trading volume, price history, momentum, or a combination of these elements to generate signals and observe market trends.
Tools of the Trade: Technical Analysis Indicators for Day Trading
You do not have to rely on one or two trading indicators only. You can choose from numerous indicators and combine two or more to have a more comprehensive and detailed market analysis.
The following sections discuss specific technical indicators.
Moving Averages or Moving Average Convergence/Divergence
This indicator helps you determine a trend’s direction and momentum. If the moving average is above zero, an asset’s price is in its upward phase. If the indicator is below zero, the asset is in its negative period.
The indicator consists of a moving average line and a slower-moving signal line. If the moving average indicator passes under the signal line, the asset’s price is declining. When the moving average line goes over the signal line, it indicates a rising price.
Relative Strength Index (RSI)
The RSI can provide you with at least three significant applications for trading:
- This indicator plots recent price gains with recent price losses as they swing from 0 to 100.
- RSI levels help determine momentum and trend strength.
- RSI can function as a trading indicator for overbought and oversold market conditions
A stochastic oscillator measures your chosen asset’s current price relative to its price range over a specific period. This indicator uses a scale from 0 to 100 to show an uptrend when the asset’s price reaches new highs and a downtrend when the price makes new lows.
Average Directional Index (ADX)
The average directional index (ADX) indicator can measure trend strength and momentum.
If the ADX indicator exceeds 40, the trend may have significant upward or downward directional strength. If the indicator is below 20, consider the signal non-trending or weak.
The ADX is an indicator you can use to identify trends. It is derived from an asset’s plus (+) directional movement and the minus (-) directional index.
When the current high price minus the previous high is larger than the previous low minus the current low, the directional movement becomes positive.
Alternatively, when the previous low minus the current low is larger than the current high minus the previous high, the directional movement is negative.
The Aroon oscillator measures whether your chosen security is in a trend or hitting new highs or lows over a specific period.
This indicator has two lines: the Aroon up line and Aroon down line.
When the Aroon up line crosses above the Aroon down line, you can interpret this event as the first sign of a potential trend change.
If the Aroon up line hits 100 and remains close to that level while the Aroon down line stays near zero, consider this occurrence a positive uptrend.
Accumulation and Distribution Line
Consider using the accumulation and distribution line to evaluate an asset’s in-and-out money movement. This line focuses on an asset’s closing price for the period and where the closure falls within that period’s trading range.
This indicator can show buying interest if the line indicates an uptrend and the stock closes above the halfway point of the range. However, if the price closes at the lower end of the range with negative volume, the line can indicate a potential downtrend.
Use the OBV (on-balance volume indicator) to help you measure an asset’s positive and negative volume flow over time. This indicator calculates risk using a running sum of the asset’s up volume minus the down volume.
The up volume indicates the day’s volume when the price rallies, while the down volume is when the price declines. Your asset’s daily volume gets added or deducted from the indication depending on whether the price increases or decreases.
When the OBV rises, it shows you that buyers are stepping in and willing to push the price further up. But when the OBV falls, the selling volume likely exceeds the buying volume, indicating lower prices. This way, the OBV indicator functions like a trend confirmation tool.
One of the basic momentum indicators you can use for trading is the MACD (moving average convergence/divergence).
Moving Average Convergence/Divergence (MACD)
If you’re a novice trader, you can use the MACD indicator to help examine rapid price changes. This tool, typically set at 9, 12 or 26 periods, measures how fast a specific market is moving while trying to pinpoint natural turning points.
This indicator can generate buy or sell signals when the histogram reaches a peak and reverses course to penetrate the zero line. The speed of change and the histogram’s height or depth interact to generate valuable market data.
Aside from using volume and momentum indicators, you can also use trend indicators like exponential moving averages (EMAs) to help you trade based on an asset’s trend movement.
50-Day EMA and 200-Day EMA
If you have used SMAs (simple moving averages) as your trading indicator, the 50- and 200-day exponential moving averages (EMAs) are similar but more responsive versions.
You can use the 50-day EMA to measure a security’s average intermediate price and the 200-day EMA to measure the asset’s average long-term price.
Mean Reversion Indicators
These indicators help you identify pivot points that signal price trend reversals. Bollinger Bands are one type of mean reversion indicator.
You can use Bollinger bands to identify turning points like retracements by measuring how far the price travels before triggering a reversionary impulse that moves back to the mean.
Retractments are pullbacks or minor changes in the direction of an asset’s price.
Bollinger Bands also expand and contract to react to volatility fluctuations. These reactions can indicate to an observant trader when such changes no longer impede rapid price movement.
Volume Weighted Average Price (VWAP)
The VWAP trading indicator uses pricing and volume information to calculate your chosen asset’s average price during the trading session. This way, you can get a fair price representation of that asset based on the transaction volume instead of the closing price.
The VWAP indicator is usually plotted as a moving average (MA) on a chart. A bullish sentiment dominates the market if the price is above the VWAP.
Also, VWAP can indicate if an asset is cheap when the price hovers below the indicator. If the price hovers above the VWAP, the security is likely of value.
You can plot this indicator on the price chart to determine the current trend using the asset’s placement compared to the price.
If the supertrend appears below the bars, the price movement is on the uptrend. If the supertrend is above the bars, the trend is likely downward.
Supertrends can also indicate a buy signal when they close below an asset’s price on the chart and the colour shifts to green. Meanwhile, a sell signal occurs when the supertrend closes above the asset’s price and the colour turns red.
Standard deviation helps you measure price movement sizes. It also allows you to identify how likely volatility will affect future prices.
However, one limitation of this indicator is that it cannot predict the price’s direction. Only volatility can affect standard deviation readings.
Standard deviation compares historical price movements to current price movements. Traders using this indicator believe that significant price moves follow small price moves, and small price moves follow big price moves.
Other Technical Indicators
If you prefer other trading methods besides day trading, consider the following technical indicators for your trading strategies.
Support and Resistance
Support and resistance are levels that an asset may find difficult to pass. Support is a level characterised by a strong demand that prevents an asset’s price from decreasing. You can view support as a price floor where a financial asset or currency may struggle to pass below.
The support level’s logic is that an asset with a declining price can make buyers more inclined to buy and force sellers to sell. Demand will likely overcome supply when the price decreases to the support level.
Meanwhile, the resistance level is the opposite of the support level and keeps the price from moving higher. When the price increases towards the resistance, sellers become more likely to sell while buyers become less inclined to buy.
These leading indicators use the Fibonacci sequence to identify areas of price support or resistance along a line between a high and low price at 0%, 23.6%, 38.2%, 50%, 61.8%, and 100% of the trend line.
Note that 0% is considered the start of the retracement. Meanwhile, 100% is a complete opposite or reversal of the original price before the move.
Fibonacci retracement levels are horizontal lines that can help you analyse areas where prices may encounter a reversal and retrace a previous trend.
Pairing up two indicators on your price chart can help identify points to initiate and get out of a trade. For example, you can combine the RSI and MACD lines on the chart to suggest and help reinforce a trading signal.
When you select pairs, choose one indicator to use as a leading indicator and the other as a lagging indicator. Leading indicators generate signals before the conditions to enter a trade appear. In contrast, lagging indicators create signals after those conditions appear.
You can use lagging indicators to confirm signals generated by leading indicators, so you can avoid entering or exiting a position on false signals.
Using Multiple Indicators
You can also use multiple indicators per type, such as two leading and two lagging indicators.
Consider using multiple indicators if you prefer more trading signal reinforcement to help increase your chances of excluding false signals.
Commodity Channel Index
CCI is among the best technical indicators due to its accuracy. It’s also one of the most common for day trading. You can use this indicator to warn of extreme conditions or identify a trend by measuring your chosen asset’s current price level to an average price over a specific period.
When the asset’s price rises above the average, the CCI level becomes high. Meanwhile, CCI is low when prices dip below their average. You can also use CCI as an indicator for overbought or oversold levels.
Most CCI levels occur between -100 and +100. Consider being cautious when placing your trades when an asset’s price passes these extremes.
A positive CCI value usually favours bullish traders (those who expect prices to rise). In contrast, a negative CCI favours bearish traders (those who expect prices to fall).
Ichimoku Kinko Hyo
Ichimoku is a leading indicator that consists of multiple lines that, when taken together, form a “cloud” on the chart.
Ichimoku moves fast with the increase or decrease in price. You can determine the trend by using the cloud.
You can also use this cloud to perform various strategies to find entry and exit points. For example, when the price moves above the Ichimoku cloud, you can consider this event bullish. On the other hand, you may find a sell signal when the price moves below the cloud.
Squeeze Pro Indicator
The squeeze is a directionless indicator consisting of dots on the zero line on the chart. You can use this indicator to determine if a potentially explosive price move is coming. The higher the compression in an asset’s price, the more potential energy is building.
This indicator uses a momentum oscillator that shows potential for directional price movement. If the angle of the momentum shows the price returning to the zero line, a directional price reversal may be coming.
The Donchian channel is generated by calculating an asset’s highest high and lowest low for a specific period.
When there is a breakout from the upper or lower band of the Donchian channel, you can interpret this event as the start of a new trend. This channel can help you analyse the price volatility by showing a narrow channel if the price is stable and a broader channel if the price fluctuates often.
Whichever indicators you use for charting, analyse them and take notes on how they perform over time. You must also identify an indicator’s drawbacks, like whether it produces many false signals, fails to signal or causes you to miss a trading opportunity.
Whilst observing your indicators, you may notice that some are effective for specific financial instruments but ineffective for others. For example, one indicator may favour you if you use it for stocks but not forex.
You can also consider swapping an indicator for one of its variants or changing how that indicator makes calculations. Adjusting indicators can help fine-tune your trading and improve your chances of success.
Many online trading platforms allow you to trade in several markets, giving you plenty of opportunities to test which indicators work best. Taurex offers trading in the following markets:
What You Need to Know Before Using Trading Indicators
When you use trading indicators, the first rule is to avoid using too many indicators at a time or use them in isolation. Try focusing on a few that you believe are best suited to your strategy and trading goals.
Trading indicators can also help you confirm a buy or sell signal. If one indicator shows a buy signal but the price action tells you to sell, consider using different indicators or time frames until you confirm the signals.
Another thing you must remember is that you must stick to your trading plan and keep sight of your goals. Implement your trading rules consistently when using indicators.
How to Use the Best Day Trading Indicators
When using day trading indicators, consider keeping your charts clean and organised. Your charting platform serves as your portal to the markets, so you must ensure that your charts help you instead of hinder your market research.
Keep your charts and workspaces easy to read. Doing so can help increase your situational awareness to comprehend market events and respond to them quickly.
You can also use your indicators more efficiently by setting up aesthetically attractive and clean charts and workstations.
Many trading platforms allow you to change your chart’s background colour, the indicator’s style and colour, and the font’s size and colour. These features can give you considerable flexibility regarding your chart’s colour and design to help with visibility and awareness.
If you are still a beginner day trader, avoid overloading yourself with data, especially if you have yet to get used to trading in multiple markets. Start with one or two trades and indicators and gradually increase them as you gain experience.
Many traders today use several monitors to display various charts, indicator notifications, and order input windows. Avoid using every square inch of your screen for technical indications to avoid information overload and a cluttered workspace.
Information overload happens when you try to comprehend so much data that it becomes lost, and you experience analysis paralysis. If you face too much information, you will most likely be unable to respond.
“Can I Match Different Indicators for Day Trading?”
Combining different indicators is not only possible. Matching these indicators can help you reap their benefits and become successful in trading. Suppose one indicator’s signal confirms the signal of another. The result can help amplify that signal, making you more likely to make a trading decision.
Ensure you combine only a few indicators under the same class. One issue with indicator redundancy is that when similar indicators say the same thing, the information they supply may put too much weight on you and cause you to miss other things.
For example, a trader utilising two or more trend indicators may assume the trend is stronger or weaker than it is and overlook other critical signs in the charts.
To prevent redundancy while combining indicators, use a diverse selection of indicator types. For instance, instead of matching three momentum indicators, consider combining one momentum indicator, one trend-following indicator, and one volatility indicator.
If you know which indicators fall under which categories and how to combine the best indicators meaningfully, you will likely become better at making trading selections.
Ensure that you match indicators carefully. An incorrect combination of indicators can cause confusion and prevent accurate price interpretation, resulting in poor trading judgments.
“What Are Some Ways to Apply Technical Indicators to My Day Trading Practices?”
If you are a beginner trader, keeping your trading simple is essential. With so many indicators out there, you can easily get overloaded with information, causing your interpretation to become inconsistent or incorrect.
Consider starting with simple trading indicators and mastering them. Your goal is to make efficient, accurate, and rapid trading decisions gradually. Indicators should help you make better judgments rather than limit your options.
Consider employing indicators that fit your trading strategy and style. If you prefer quick movements and short holding periods, consider using intra-day trading indicators with smaller time frames.
For example, using a 5- and 15-period moving average and a stochastic oscillator on a five-minute chart can provide accurate intra-day trends. If you are a swing trader, consider utilising a daily chart with a 50- and 200-period MA to determine the asset’s general trend.
How Traders Identify Entry and Exit Points
To identify the best entry and exit points for trading, consider the following approaches:
- Some traders use price action analysis to focus on an asset’s price and identify unique patterns.
Patterns include chart patterns and candlesticks (so-named due to their candlestick-like appearance on the chart).
A candlestick price chart displays an asset’s high, low, open, and closing prices for a specific period.
For example, an asset’s price will likely have a bullish reversal when the asset’s candlestick forms a hammer-like pattern.
A hammer pattern occurs when an asset trades significantly lower than its opening but rallies later in the day to close near the opening price.
- Chart patterns have two categories:
- Continuation pattern: The price will likely continue to rise or fall.
- Reversal pattern: The trend will start changing and go the other way.
Why Should You Find the Best Entry and Exit Points?
Finding the best entry and exit points can help increase your profit potential in trading.
Suppose a company’s share price drops from $50 to $40 in a specific period, and you believe the price will bounce back. Identifying when that bounce happens and at which price level can help you plan your entry into or exit from the position.
Which Technical Indicator Can Spot Overbought or Oversold Conditions?
The RSI is one of the popular technical indicators that can help you identify overbought or oversold assets. The RSI provides a measurement between 0 and 100.
A reading above 70 usually indicates overbought conditions, while a reading below 30 indicates that the asset is likely oversold. These numbers can change depending on your strategy.
Novice Trading Strategies
When building their first trading screens, some novice traders use as many indicators as possible on their favourite securities’ price bars.
Indicators typically work best when they simplify your analysis by cutting through the noise and providing usable output.
Note that if you use a “more is better” approach by stacking multiple indicators, you may experience confusion. You may be looking at the market from too many angles simultaneously.
You can subdivide each indicator type into leading or lagging. You can use leading and lagging indicators in the following ways:
- RSI (leading): Measures buying and selling pressure oscillations
- Momentum indicator (leading): Evaluates the price change speed over time
- Trend indicator (lagging): Analyses whether a market moves up, down, or sideways over time
- Mean reversion indicator (lagging): Measures how far a price swing can stretch before a counter impulse triggers a retracement
- Volume indicator (leading or lagging): Tallies trades and quantifies whether bullish or bearish traders are in control.
How Trading Works
Day trading involves buying and selling financial assets to generate short-term profits daily.
Traders profit by buying an asset, the price of which they expect to go up. They can also make money by shorting (selling assets they do not own) if they believe the stock price will continue falling. These traders rarely hold an asset for the long term and typically exit their position before the day’s trading hours end.
Day trading differs significantly from the concept of investing. When you invest, you buy undervalued assets and hope their value rises in the long term.
While day traders buy and sell financial instruments daily, investors usually buy and hold their trades for weeks, months, or years.
Traders typically focus on an asset’s overall price and do not mind long-term fundamental issues like valuations, revenue growth, and industry trends. These traders will buy and sell any asset if the price is acceptable.
- What are the stock market indicators’ flaws?
Indicators can help you assess momentum and averages quickly. Even when you can use some of these tools as leading indicators, they are not perfect market predictors.
Although you can compare indicator readings to historical levels to determine the probabilities of what can happen, none of these functions provides guaranteed results.
Additionally, unexpected events can always happen and negate previously successful strategies.
- What should I do if an indicator starts contradicting and diverging during a specific trade?
Consider exiting your position when what the indicator shows and what your strategy dictates no longer align.
Ensure that your stop-loss measures are in place. Observe how the movement settles if your indicators diverge or contradict during a trade.
Familiarity can help you build confidence, so familiarise yourself with the indications before rushing your trades.
- What indicators do professional traders use?
Professional traders typically combine technical indicators with market knowledge to create a strategy that suits their needs. Although numerous indicators exist, many experienced traders use the following:
- Moving average line
- How can I use the supertrend indicator for intraday trading?
You can generate a supertrend indicator using any decent charting software. To create this indicator, open it on the chart for the stock or asset you want to follow and set the time frame to 10 minutes. You can then use the indicator to track your chosen asset’s possible buy or sell signals.
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