Best Indicators for Day Trading

An indicator is a mathematical calculation plotted on a price chart and helps traders identify signals and trends within a market. Making sure that you don't use too many indicators is one of the biggest hurdles in trading, and it's not just finding the ones that are going to be most beneficial to you.

You can analyze different trading indicators as part of your trading strategy, regardless of whether you're interested in forex trading, commodities trading, or share trading. Indicators help traders identify specific signals and trends by plotting mathematical calculations as lines on a price chart. Indicators such as leading and lagging indicators are available for trading. Indicators that lead to future price movements are forecasts while lagging indicators look at past trends and indicate momentum.

Many different technical indicators are used today by traders to predict market trends better. Traditionally, trading indicators are categorized according to their function to make them easier to understand. The most popular are oscillators, volatility, Volume, support/resistance, trend-following, and leading indicators. Some investors consider the secret to best indicators for day trading. Test out many technical indicators separately and determine the best indicators for your day trading approach. When dealing with technical indicators, it's often best to keep it simple whether you're trading stocks, forex, or futures. 

Making short-term trades and taking quick gains are the hallmarks of day trading careers. Experienced traders can make huge profits, but inexperienced ones can lose their minds.

Experienced day traders have mastered key trading strategies instead of inexperienced ones. Some have a powerful grasp of technical analysis, while others are well versed in fundamental research. Others are adept at both.

What is the purpose of technical indicators in day trading?

Day traders use technical indicators out of necessity. There is absolutely no way to make money on fast time frames with just fundamental data. For traders to be successful, they must use tools that display price action and market data to develop profitable analyses.

So how do indicators help you become profitable? Which ones do you even pick? There are roughly four-thousand technical indicators out there. For markets that have fixed volumes like the stock market, few indicators are as useful or robust as Volume.

Indicators used to provide intraday information include:

Trend

According to the indicators, the market is trending or moving in a particular direction. Typically, the trend indicators are oscillators, and they tend to move between high and low values.

Momentum

Momentum indicators reflect the trend's strength and identify the likelihood of a reversal. A momentum indicator is the Relative Strength Index (RSI), which determines the top and bottom of prices.

Volume

The Volume indicates how the Volume changes over time and how many stocks have been bought and sold. As the price changes, Volume suggests the strength of the move—another volume indicator in On-Balance-Volume.

Volatility

Volatility is one of the most critical indicators, and it indicates how much the price is changing in the given period. Volatility indicates how the price is changing. High volatility indicates big price moves, and lower volatility indicates big high moves.

10 Best Indicators for Day Trading

Moving average (MA)

According to its name, the SMA represents the average closing prices for the selected instrument. Over a specified period, we calculate the average price based on the Indicator's continuous updating. By removing noise from pricing data, the SMA Smoothes out the data.

Every beginner should learn the Simple Moving Average as their first Indicator. A chart is straightforward to use because all you have to do is look at the direction of the line to gain an idea of the price trend. If it is trending upwards, so is the instrument's price and vice-versa.

The most important thing to remember is a lagging (trend-following) indicator based on historical price movements when thinking about the SMA. Similarly, when we see the terms 50-day SMA or 200-day SMA, we should know that they refer to price action over the past 50 and 200 days, respectively.

The SMA is highly customizable, and you can construct it over short and long trading periods. Bear in mind that the quicker the time frame is, the more sensitive the SMA becomes to price changes. Traders use SMA also as support and resistance levels when applied on more extended time frames.

Exponential moving average (EMA)

It is among the most popular trend indicators because it is an enhanced simple moving average. An exponential moving average (EMA) gives recent prices greater weight than a simple moving average (SMA). Neither moving average differs in purpose or interpretation and has the same purpose.

Indicators such as the EMA are considered more timely indicators and preferred by traders looking to understand price action better. The 12-day and 26-day EMAs are usually used by short-term traders, while long-term ones use the 50-day and 200-day EMAs.

Traders use exponential moving averages to identify the oversold or overbought condition, reversing or continuing trends, and support and resistance levels. It would be best if you also looked for line crosses here, like other moving averages, to identify buy or sell signals. In technical analysis, a crossover of the short EMA over the long EMA in a positive direction is interpreted as a buy signal and vice versa. Make sure you go with the exponential moving average if you want an indicator that responds more quickly to the recent price changes in the traded instrument.

Stochastic oscillator

Stochastic is a momentum indicator that has been around for a long time and is suitable for both intraday trading and swings trading. When doing intraday trading, it is essential to analyze the stock's momentum in trading. George C Lane developed stochastic in the 1950s. 

Stochastic Indicator is calculated using the below formula:

%K = (Current Close – Lowest Low)/(Highest High – Lowest Low) * 100

%D = 3-day SMA of %K

Lowest Low = lowest low for the look-back period

Highest High = highest high for the look-back period

The default look-back period is 14 days which can change according to the trading style of the traders. For example, intraday traders can use shorter periods of Stochastic. Trading signals are generated when the %K line of Stochastic crosses the %D line.

Additionally, stochastic divergences assist intraday traders in determining price reversals. An indicator divergence occurs when two trends move in opposite directions, reflected in the price.

Moving average convergence divergence (MACD)

Indicator of moving average convergence and divergence, the MACD detects momentum shifts between two moving averages. When this Indicator is used, it can find trading opportunities around support and resistance levels.

'Convergence' means that two moving averages are coming together. In contrast, 'divergence' means that they're moving away from each other if moving averages converge, momentum decreases, and momentum increases if they are diverging.

You can recognize those trends more effectively using the moving average convergence/divergence indicator (MACD). Two lines on the chart represent MACD. A MACD line is created by subtracting an exponential moving average (EMA) over 26 from an EMA over 12. The most recent price is given more weight than prices farther out with an EMA.2 The EMA is an estimate of the asset's price over time.

The signal line is the nine-period exponential moving average in the second chart. The MACD line crosses below the signal line to signal a bearish trend; it crosses above the signal line to signal a bullish trend.

Bollinger bands

It is among the most popular volatility indicators to use Bollinger Bands. John Bollinger introduced the Indicator in the 1980s. An indicator that uses a Moving Average sandwiched between two trading bands (every two standard deviations apart) signals the price volatility levels and their evolution over time.

The best indicators for day trading are straightforward and incredibly useful because they include all the necessary pricing information in a straightforward form that is easy to understand on a price chart.

Traders use the Bollinger Bands to identify overbought and oversold conditions in the market. When the price breaks the upper line, it indicates that the market is bearish. (i.e., an excellent time to sell) The price is expected to drop. On the other hand, it is likely to rise if it crosses the lower line. It is an ideal time to purchase.

A more advanced trader will identify trading opportunities based on the price continuously touching either the lower or upper bands of the Indicator.

It is important to remember that Bollinger Bands can produce false trading signals. Be sure to combine the signal with additional tools or wait for firm confirmation to avoid being fooled. If you are using it to spot overbought or oversold signals, you should wait for an entire candle, confirming the bullish/bearish signal. It is possible that you will be at the wrong end of the trend if you open a position before then.

Relative strength index (RSI)

Technical analysis trading tools such as Relative Strength Indexes (RSI) are most common and widely used. Markets can be identified as overbought or oversold using the RSI indicator.

A simple oscillator works in this way. Based on the RSI, we can determine whether current price trends are fair based on the asset's price fluctuation. A line on a graph has a value between 0 and 100, floating between two extremes.

Traders look for convergences and divergences when using the RSI indicator. As long as the Indicator's highs and lows move in the same direction as the price trend, convergence is possible. During such periods, the trader knows the trend's strength, likely continuation, and vice-versa.

An RSI fluctuates between 30% and 70% frequently. Therefore, it buys and sells signals that are bullish or bearish.

When the RSI is around 70%, it means the market is overbought, while when it is approximately 30%, it means the market is oversold. The RSI can confirm a trend is moving towards or away from the 50% mark. However, the RSI does not work the same way as the relative volume indicator.

Fibonacci retracement indicator 

It can predict whether a market will deal with its current trend or go against it. Retracements occur when a temporary dip occurs in the market. A pullback is also known as a retracement.

Traders who think the market is about to move often use Fibonacci retracement to confirm this. That is because it helps to identify possible levels of support and resistance, which could indicate an upward or downward trend. Because traders can identify support and resistance levels with this Indicator, it can help them decide where to apply stops and limits or when to open and close their positions.

The Fibonacci Retracement usually is among each trader's top three technical tools. This Indicator represents additional support and resistance levels (horizontal lines) by plotting the most probable zones. Fibonacci numbers are used to identify these zones.

Fibonacci Retracement lines are plotted on a chart depending on the percentage of a prior price move. 23.6%, 38.2%, 61.8%, and 78.6% are the official and most widely used levels.

Traders can plot Fibonacci Retracement levels between any traded instrument's high and low price. The best support and resistance lines are drawn automatically according to the percentage levels.

Indicators help place entry orders, set targets, and plot stop-loss levels. All signals are an overbought or oversold market, a reversal, and a price break. For instance, Fibonacci Retracement Levels aren't dynamic, unlike Moving Averages. Prices do not change when Fibonacci Retracement levels are calculated.

Ichimoku cloud

Ichimoku Clouds identify support and resistance levels and other technical indicators. As well as estimating price momentum, it also provides signals to help traders make decisions. Ichimoku is translated as 'one-look equilibrium chart,' which explains why many traders rely on this Indicator when they need a lot of information in one chart. Briefly, it shows current levels of support and resistance and forecasts future levels based on market trends.

Standard deviation

A standard deviation is a tool used by traders to measure how large price movements are. Therefore, they can predict how volatility will affect future price movements. There is no way to expect whether the price will rise or fall, but volatility will affect it.

The standard deviation measures the difference between current and historical price movements. Traders widely believe that small price moves follow big price moves, and significant price movements follow small ones.

Average directional index

As a measure of the strength of a trend, the Average Directional Movement Index measures the average value of expanding price ranges. Whether a price movement is positive or negative is determined by its strength.

Three lines make up the ADX. On the chart, you will notice that two technical indicators accompany the ADX. These are the positive directional Indicator (+DI) and the negative directional Indicator (-DI).

The ADX indicates a strong trend. An ADX value above 25 indicates a strong trend. An ADX value below 20 indicates a weak trend. Alternatively, momentum indicators (+DI and -DI) represent the direction of the movement.

The +DI and -DI are used by some advanced traders as sole indicators for buying and selling. As per rule, cross between -DI, +DI & an ADX that sits above the 20 or 25 mark is considered a sell signal. Together, these indicators help day traders decide whether to go long or short or not to trade at all.

Final Thoughts

Finding the indicators that will be most useful to you and making sure that you do not put too many indicators in your trading strategy is one of the most significant challenges of trading. Many traders add too many indicators to their charts when they are first starting. You should have no more than two or three indicators. There is always a risk associated with any trading system. The situation is especially critical in fast-moving markets. Before you trade any system live, you should make sure that you have a risk management plan and practice paper trading first.

There is no doubt that intraday trading can be done using the technical indicators discussed above; however, traders must not go by one intraday technical indicator alone. Combining these indicators should be used to set up one's intraday trading strategy. 

Even though even the best technical trading indicators can't guarantee 100% accuracy, it's worth noting that even the best ones tend to be inefficient when used alone. It would be best to combine several tools when confirming the signals and to improve your trading strategy.

Many different indicators are available to traders today, which is a significant advantage. It is possible to find a technical trading tool for every style, level of understanding, and investment objective, ranging from decades-old and widely-used ones to custom setups.

Ichimoku Cloud, or Ichimoku Kinko Hyo, is another popular indicator used by day traders. Testing out trading indicators with paper money is best to identify which ones work best for your specific trading strategy and market. You may then go live with them if they are effective. On the other hand, they will probably disappoint you when you trade with real money if they do not deliver on the training ground.