Best Indicators for Day Trading: Detailed Trading Indicators explained!

John James
October 7, 2021
There are several types of trading indicators, including leading indicators and lagging indicators. Best indicators for day trading
indicators-for-day-trading

Technical indicators are chart analysis tools that help traders better understand and respond to price movements.

Various technical analysis tools analyze trends, provide price averages, measure volatility and much more.

This article examines the types of technical indicators available, explains how to react to technical signals, and provides key tips on making the tools a practical part of your trading strategy.

Is trading by indicators a science or just modern hocus-pocus? How can I start trading indicators? Securedbrokers has taken on these and many other questions and summarized them here.

Table of Contents

What is indicator trading?

Regardless of whether you are interested in forex trading , commodities trading , or stock trading, indicators help you determine the trend. 

Technical analysis can be a valuable part of your trading strategy. Technical analysis also includes studying various trading indicators.

Trading indicators are mathematical calculations presented as lines on a price chart that can help you identify specific signals and trends in the market.

There are several types of trading indicators, including leading indicators and lagging indicators.

A leading indicator is a forecast signal that predicts future price movements, while a lagging indicator looks at past trends.

Advantages and disadvantages of indicator trading at a glance

Before you introduce indicator trading as a new trading strategy in your everyday life, you should consider whether this type of trading is suitable for you.

To that end, we’re going to list some of the key pros and cons of indicator-based trading. After reading this article, you should know when indicators can be useful and when to be careful when using them.

  • simplification
  • Quick decision making
  • Confirmation tool
  • Ability to combine
  • Ignorance of the bigger picture
  • Special events
  • Irrational market

Indicator trading advantages

Trading indicators offers several advantages over traditional trading methods. These advantages are as follows:

simplification

As mentioned briefly, indicators mainly present the existing price and volume data in the price charts .

Especially beginners who have less knowledge in reading price charts, indicators can use the price charts to understand accurately.

Indicators are also a great tool for determining market strength.

With the indicator for the moving average, for example, the direction of the trend can be determined.

Securities are found. These cannot be easily identified, especially by beginners, without these indicators.

Quick decision making

If you focus mainly on indicators when trading, they allow quick decision-making.

Area moves or that security develops a positive trend; indicators show these facts purely objectively.

This allows a quick decision as to whether to buy or sell the security. For this, you should, of course, have thought of an appropriate trading strategy beforehand.

Without indicators, it is often impossible to make such quick decisions. Hence, we can say that indicator-based trading enables us to make comparatively faster decisions.

Confirmation tool

Indicators are an excellent confirmation tool even for experienced traders.

For example, a technical trader identifies a candlestick pattern and wants to trade based on that pattern.

To confirm whether the signal provided by the pattern is correct or not, he can take the help of a technical indicator such as RSI or Stochastic.

When the indicator supports the signal provided by the pattern, the trader can trade more safely.

Ability to combine

Indicators can also be combined to understand the market better.

For example, moving averages can be combined with Fibonacci levels. Also, Stochastic can, with many other reliable indicators combined, are too accurate signals to generate.

We can even add an unlimited number of indicators if we want. However, caution is advised here. Indicators should be used to simplify a price chart, not to make it more complex.

Combine trading indicators

If you want to combine different trading indicators, you should definitely not overdo it . In principle, the application of several indicators on one diagram does not lead to a better result. It is important to keep an eye on the various indicators. Merging too many indicators can lead to false signals and signal confirmations.

If you want to combine trading indicators, you should prefer indicators of different types over multiple indicators of the same type.

Indicator trading – disadvantages

So there are a lot of advantages to trading indicators. However, there are also significant disadvantages to indicator trading that you as a trader should be aware of.

Ignorance of the bigger picture

Beginners who get used to trading these indicators too early can never understand what is going on behind the charts.

If you only rely on indicators, you can never become a professional technical trader. You cannot tell whether the signal generated by the indicator is correct or not.

Hence, it is always important to understand why the indicator moves the way it does. So indicators can be of great help but shouldn’t be the only tool of a good technical trader.

Special events

One of the major drawbacks of indicator trading is that if you rely too heavily on indicators, traders often overlook special events.

Quarterly figures, a stock split and many other factors can have a major impact on the performance of a security. Even an event like the coronavirus is impossible to predict from indicators.

Therefore, we would like to take this opportunity to emphasize that one must not overlook the overall picture. Indicators are intended to be of assistance but are not enough on their own for successful trading.

Irrational market

Indicators give a very objective and technical picture of the performance of a share or security.

Unfortunately, security does not always behave logically.

Indicators can also be helpful in irrational market situations in recognizing trend movements and foreseeing them in good time.

However, every trader should exercise a certain amount of caution here. Sometimes the price development of security is unpredictable and does not follow any previous indicators.

indicators-for-day-trading

The best trading robots for indicator trading

It can be very difficult for the human brain to grasp all the information necessary for the perfect trade.

For this reason, so-called trading robots were developed some time ago, making it possible to identify price developments and fluctuations in seconds and act accordingly. Bitcoin Era is our test winner Trading Robot:

Can courses be predicted with indicators?

Are Indicators the Holy Grail? Can you predict what the market will do next?

No, not true. However, the answer to this question depends a little on the period.

The shorter the period, the better indicators are at making correct predictions. While no indicator can tell you with 100% certainty what will happen in the future, they can give important pointers.

Although indicators are helpful in predicting the short term direction of the stock market, no one can consistently predict the highs and lows of the market and add a date to it.

The holy grail of the market is still difficult to pin down, but many are still looking. Even with a handful of reliable indicators in hand, it is next to impossible to predict the unexpected, such as when the price of oil or interest rates will rise or when the next war might break out.

For traders with short-term attitudes, indicators are invaluable. However, long-term investors may find many technical indicators less helpful.

Day trading indicators

With what we have just learned, it is, of course, clear that indicators are beneficial in an exceptional type of securities trading: day trading.

Successful day traders almost always use technical indicators. There is absolutely no way to make money on fast time frames with just fundamental data. Whether a company has a good P / E ratio or was successful in the last quarter is less interesting for day traders than the current price promotions and market data.

That is why day traders use tools such as indicators that show these price actions and market data. This can be used to create analyzes that will hopefully be profitable.

The best technical indicators that day traders use on a regular basis are as follows:

  • RSI – Relative Strength Index (One of the best momentum indicators for intraday trading)
  • Moving averages  (Can help a trader determine the trend)
  • Channels – (Can help traders see a change in the rhythm of the market)
Trading strategy indicator

An indicator itself is not a trading strategy. While an indicator can help you identify market conditions, it does not constitute a strategy.

A strategy is like a dealer’s set of rules. Successful technical traders often use multiple indicators to form a trading strategy.

However, different types or categories of indicators are typically recommended, such as: A momentum indicator and a trend indicator when more than one indicator is used in a strategy.

Today there are many different categories of technical charting tools, including trend, volume, volatility, and momentum indicators.

The use of three different indicators of the same type, the pulse, leads to the multiple counting of the same information. The whole thing is then called multicollinearity.

Multicollinearity should be avoided as it produces redundant results and can make other variables appear less important.

Instead, traders should choose indicators from different categories. Often one of the indicators is used to confirm that another indicator is producing an accurate signal.

For example, a moving average strategy might employ a momentum indicator to confirm the validity of the trading signal. The Relative Strength Index (RSI), which compares the average price change of the advancing periods with the average price change of the falling periods, is an example of a momentum indicator.

So the RSI could be used to confirm any signals that the moving average is generating. Opposite signals could indicate that the signal is less reliable and that trading should be avoided.

Regardless of which indicators are used, a strategy must specify exactly how the metrics will be interpreted and exactly what action will be taken.

Indicators are tools that traders use to develop strategies. They do not generate their own trading signals. As a result, ambiguity can lead to problems (in the form of trading losses).

The Best Indicators for Day Trading: Which Indicators Should You Consider When Trading?

indicators-for-day-trading

Technical indicators can be divided into 4 unique groups, with individual philosophies on forecasting prices.

These 4 groups are:

  • Trend indicators
  • Momentum indicators
  • Volatility indicators
  • Volume indicators

Each of these groups has a common goal: to gain insight into the future prices of your trading assets.

Trend indicators

Trend indicators show you in which direction the market is moving if there is a trend at all. They are sometimes called oscillators because they move like a wave between high and low values.

Trend indicators combine sporadic and different prices into a uniform line. The idea is to locate and track trends.

Trend reversal indicator

In general, trend lines are an important tool for any trader looking for market reversals. The trend line defines and proves a trend. The signal for a trend reversal is given when the price breaks one of these trend lines. It should be noted. However, that false outbreaks often occur here, which is quite normal.

So you have to judge for yourself whether it is a trend reversal or not. Usually, one can judge this based on the strength of the trend line break.

Momentum indicators

Momentum indicators should be part of every trading strategy as much as possible, as they give you information about the strength of the trend .

You can also use these indicators to identify possible reversals, i.e. when the trend is losing strength.

The indicator values ​​usually oscillate around a baseline within a predefined range, but their oscillation may not be limited within a range.

Since momentum measures, the rate of change, a rapid rise in price leads to strong momentum, while slower price changes indicate weak momentum.

Volatility indicators

Volatility indicators take into account the price changes over a certain period of time.

Knowing volatility can help you make profits on more volatile assets. A trend can easily form with higher volatility.

Lack of volatility can indicate a low chance of finding a profitable trading opportunity as the price does not change much.

Volume indicators

Volume indicators measure changes in the volume of the underlying asset. They can be a helpful tool in confirming trend strength.

You measure interest in a particular asset through buying and selling activity.

Traders should avoid opening positions during periods of low volume. As low volume markets are more likely to produce false technical trading strategy indicators.

Moving averages

Moving averages are a popular indicator for day traders to determine the current trend. They are used as both a trend following indicator and a counter-trend trade indicator.

Moving averages can be broken down into simple moving averages (SMAs) and exponential moving averages (EMAs).

The “Simple Moving Average” (SMA) is an indicator that the direction of current price developments determined will be considered separately without short-term price spikes. The moving average indicator combines the price points of a financial instrument over a certain period of time and divides them by the number of data points to represent a single trend line.

The data used depend on the length of the moving average. For example, a 200 day MA requires 200 days of data. Using the Moving Average indicator, you can examine the level of support and resistance and see previous price movements (the market history). This means that you can also determine possible future patterns.

In the following picture, the orange line represents the moving average:

Exponential Moving Average (EMA)

EMA is another form of moving average. In contrast to the SMA, current data points are weighted more heavily to react better to new information.

In conjunction with other indicators, EMAs can help traders confirm key market moves and assess their legitimacy.

The most popular exponential moving averages are the 12- and 26-day EMAs for short-term averages, while the 50- and 200-day EMAs are used as long-term trend indicators.

Moving Average Convergence Divergence (MACD) setting day trading

The MACD indicator short for Moving Average Convergence Divergence) is a powerful technical indicator that combines the best trend following indicators and oscillators.

The MACD consists of two lines and the MACD histogram.

The first MACD line usually represents the difference between two moving averages (a faster and a slower MA), while the second MACD line is a moving average of the first MACD line.

The MACD histogram shows the difference between the two MACD lines in a graphically appealing way.

When the two lines cross, the MACD histogram essentially returns zero if the two lines deviate from each other, the MACD histogram increases.

The MACD indicator is widely used to confirm the trend on a price chart.

When the last histogram bar is higher than the previous bar, it shows that an uptrend is starting to form. When the last bar is lower than the previous bar, it signals the start of an impending downtrend.

 

Relative Strength Index (RSI)

The RSI (Relative Strength Index) was developed by J. Welles Wilder in 1978 and is still one of the most popular indicators for day trading.

The RSI measures the amount of recent price changes and returns a value between 0 and 100 .

The indicator is mainly used to determine overbought (

overbought

) and oversold (

oversold

) Market conditions used.

A value above 70 usually signals that the underlying market is overbought. Whereas if reading is below 30, it signals that the market is oversold.

A common trading strategy based on the RSI is to buy when the RSI drops below 30 . Conversely, a trader might sell value if the RSI rises above 70.

However, keep in mind that this strategy will produce the best results in markets that are not trending.

When the market is trending, the value of the RSI can remain overbought or oversold for a long period before we see a market correction.

For this reason, you should use additional technical indicators (both trend following and momentum) in your trading strategy.

The following graphic shows the RSI indicator in a very volatile market based on the Nvidia (NVDA) share . Notice the overbought and oversold levels and the price reaction that followed

 

Bollinger bands

Another popular indicator for day traders is the Bollinger Bands. The Bollinger Bands are based on a simple moving average.

They can be used to determine current market volatility.

The Bollinger Bands consist of three lines: The middle line is a simple moving average. The upper and lower lines are lines that are two standard deviations from the simple moving average distance.

Since the standard deviation measures volatility, the bands widen as market volatility increases and decrease as volatility decreases.

This phenomenon can be used to develop interesting trading strategies like the Bollinger Squeeze. Low volatility results in very tight Bollinger Bands, which creates a squeeze.

Traders who expect volatility to increase after a period of very slow trading can take a long position when the last bar closes above the upper band.

Conversely, you can take a short position when the last bar closes below the lower band .

Note that around 95% of all price movements occur within the two standard deviations above/below the simple moving average.

Here is an example of the Bollinger Bands indicator. Notice the Bollinger Squeeze on the left side of the graph

Commodity Channel Index (CCI)

Donald Lambert developed the CCI or Commodity Channel Index in 1980.

The indicator compares the current price with the average price over a certain period of time and fluctuates above or below a zero line.

Around 75% of all CCI values ​​are in the range between -100 and +100, with values ​​above this range indicating extremely strong price changes compared to the average price .

Despite its name, the CCI indicator can be successfully used for various types of markets, including the stock market and the forex market.

Day traders usually apply the CCI indicator to short-term charts to get more trading signals.

When the CCI +100 rises, it signals a buying opportunity, and when the CCI under -100 falls, it signals a sales opportunity.

 

Fibonacci

Although the Fibonacci tool is not a regular technical indicator, it is still one of the most effective tools for day traders.

The Fibonacci indicator is based on the Fibonacci number sequence, which looks like this: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, …

In the Fibonacci number sequence, each number is the sum of the two previous numbers.

If we divide two consecutive numbers, the result is always the same: 0.618 – also known as the golden ratio.

This ratio is used in the Fibonacci tool to determine possible retracement levels in trending markets. That is why Fibonacci is often called Fibonacci retracement. Other important Fibonacci values ​​are 38.2% and 50% .

When trading Fibonacci retracement levels, don’t focus too much on precise levels. Instead, think of Fibonacci levels as ” zones ” where price is more likely to return and then trend forward.

For example, the zone between 38.2% and 61.8% can be viewed as an important support zone during uptrends and as a resistance zone during downtrends.

 

Average Directional Index (ADX)

The Average Directional Movement Index (ADX) is a trend following indicator that can be used to determine both the direction and strength of the underlying trend

The ADX display consists of three lines: the ADX line, the + DI line and the – DI line. The lines + DI and –DI determine the direction of the trend.

When the + DI line crosses the -DI line , the market enters an uptrend. Conversely, when the –DI line crosses the + DI line , the market will enter a downtrend.

The ADX line is used to determine the strength of the trend: a reading above 25 usually signals a weak trend. Readings between 25 and 50 indicate a strong trend and readings over 50 indicate a robust trend.

When the reading hits 25 or more, you could wait for pullbacks (e.g., to a major Fibonacci level) in the direction of the underlying trend.

The indicator can also be combined with oscillators to reduce the number of fake signals . When the ADX example shows the market trend, do not look for overbought and oversold levels in the RSI indicator.

Volume Oscillator (VO)

The Volume Oscillator (VO) identifies volume trends using a two moving average system.

The volume oscillator measures the difference between a faster and a slower moving average (MA).

  • When the fast MA is above the slow MA, the oscillator is positive.
  • If the fast MA is below the slow MA, the oscillator is negative.
  • The volume oscillator is zero when the two MA cross each other.

 

On Balance Volume (OBV)

On Balance Volume (OBV) is a momentum trading indicator that uses volume flow to predict changes in stock prices.

Joseph Granville first developed the OBV metric in 1963 in Granville’s New Key to Stock Market Profits book.

Granville believed that volume was the key force behind the markets. Therefore, he developed OBV so that it projects when significant changes are to be expected in the markets due to changes in volume.

He believed that if the stock price increases sharply without a material event, the price will inevitably jump up or down.

 

Stochastics

The stochastic indicator is an oscillator that compares the actual price with a price range over a certain period.

The interpretation of the Stochastics indicator is quite similar to the RSI indicator: traders look for overbought and oversold levels in stochastics to determine whether to buy or sell a security.

In contrast to the RSI indicator, which shows overbought and oversold levels at an indicator value of 70 and 30, respectively (in the default settings ), traders look at levels 80 and 20 when using the Stochastic indicator.

Stochastics has similar drawbacks as RSI. While the indicator in different markets works great, it gives wrong signals back when the market trend. For this reason, it is better to combine different types of indicators, such as Oscillators and trend following indicators.

If a trend following indicator shows that the market is trending, ignore the oscillator signals and vice versa.

indicators-for-day-trading

Trading indicators conclusion – our experience and recommendation:

As already mentioned, use technical indicators to assess earlier price data and remain behind the current price.

However, since historical data is the only information traders need to anticipate future price movements, technical indicators play an important role in a well-defined trading strategy.

Avoid adding too many indicators to your chart as the same type usually return similar trading signals.

Instead, choose just one indicator from each group (trend following, momentum, volatility and volume) and combine their signals to confirm a set-up and trade based on it.

An effective combination of indicators could, for example, be the moving averages, the RSI indicator and the ATR indicator.

Do not primarily base your trading decisions on indicators and their signals.

Trend following indicators returns a buy signal when prices rise, even if the market is trading sideways. Similarly, oscillators and momentum indicators give a sell signal when prices start rising during an uptrend.

There is no single best indicator, which is why you should combine different types of indicators and incorporate them into a broader trading strategy.

The advantages of indicator trading at a glance

  • simplification
  • Quick decision making
  • Confirmation tool
  • Ability to combine
4.9
4.9/5

Our recommendation: Trading at Investby

Our recommendation: Trading at Investby

  • The broker provides an Islamic Account
  • It provides a dedicated account manager
  • Receive customised investment news
  • Trade with a variety of assets
  • There’s no deposit limit
ABinvesting Review
4.5
4.5/5

Our recommendation: Trading at ABInvesting

  • Acknowledge the financial markets through education material 
  • Free VPS is available 
  • Get a swap discount of 50 per cent 
  • Islamic Account is available to traders 
  • Select account types of your interest
4.9
4.9/5

Our recommendation: Trading at PrimeFin

  • Fifth decimal available 
  • Spreads begin from 0.03 pips
  • Commission is zero  
  • Full 10-hour support  
  • News alerts and VPS for traders

FAQs

You can help. Technical indicators are only useful as part of a full reactive trading system. Indicators alone are not enough for successful trading but should be combined with other factors and a trading strategy.

Trading via indicators is, in principle serious, the largest investment banks trade based on indicators. Moreover, trading via indicators and signals is used by many people to sell non-working trading courses. That is why you should always be on your guard about how you interpret indicators and which trades you make based on them.

In simple terms, price action is a trading technique that enables a trader to read the market and make subjective trading decisions based on recent and actual price movements rather than relying solely on technical indicators.

The MACD has many strengths. However, it is not infallible. The MACD often shows false signals, especially in sideways markets. Since the MACD is based on underlying price points, overbought and oversold signals are ineffective as a pure volume-based oscillator.

Get a Callback

A trusted broker will contact you today.

Name(Required)