Technical indicators are an important part of a day traders tool set. Indicators are considered and studied thoroughly for their capacity to give insight into future price prediction. If you’re looking to trade the financial markets on a day to day basis, then at one point, you must familiarize yourself with the concept of technical analysis.
There are a number of technical indicators created by past traders and mathematicians to try and find methods of forecasting future trends and pricing. We share with you what we believe to be the top 5 intraday technical indicators that can help you on your day trading journey.
- Moving Average (MA)
- Moving Average Convergence Divergence (MACD)
- BOLLINGER BANDS
- RELATIVE STRENGTH INDEX (RSI)
- STOCHASTIC OSCILLATOR
1. MOVING AVERAGE (MA)
The moving average indicator helps give an idea of current trends and trend reversals of the underlying asset. If you’ve been reading up or looking into trading, I’m certain you would have heard support and resistance levels. If so, you should know that It’s the moving average indicator that factors in different price points helping identify support and resistance levels within an allotted time period.
If a security does not drop below a certain price point, that price point would be tagged as the support level. Likewise, if the underlying security’s pricing keeps reaching a ceiling but not surpassing it, then it’s this price point that would be referred to as the resistance level.
If the price breaks through the resistance level, then it is considered to be on a bullish trend. On the flip side, if the price drops below the support level, then it’s considered to be on a bearish trend.
TRADING TIP
Use the moving average indicator to predict price action high's and low's
2. MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD)
The MACD is yet another trend indicator designed to reveal changes in the strength, direction, momentum and duration of a trend in a stocks price. A very powerful indicator which is generally more useful when there’s some sort of consistent range in the underlying asset that’s being examined. It wouldn’t be very effective or accurate to use the MACD if the price action of the security was of a unpredictable and haphazard nature.
By comparing two different moving averages, the MACD indicator can spot changes in trends or momentum. How so? When the moving averages in question begin to converge, then it would hint that momentum is shrinking. On the other hand, if the two moving averages are diverging, then this would reflect that momentum is growing.
TRADING TIP
Use the MACD when the asset has a consistent and predictable price range history
3. BOLLINGER BANDS
This indicator is one of my favorite ones. Why? Because it provides an idea of what kind of volatility the asset experiences over time. Bollinger bands display the upper and lower price ranges in which an asset generally trades. With this information, you can employ a variety of trading strategies.
If the bollinger bands are narrow for a lengthy period of time, then that suggests the asset is one of low volatility. However, if the bands are wide, then this demonstrates that the asset is volatile for at least that time period.
Day trading is in itself a volatile profession, which is why the usage of bollinger bands really help reduce excess volatility and ultimately protect your capital. It can be viewed as a double edged sword. How so? Volatility is what day traders feed off! So trying to reduce it drastically will negatively effect your bottom line.
TRADING TIP
Couple the bollinger bands with the moving average while keeping an eye on volume
4. RELATIVE STRENGTH INDEX (RSI)
In simple terms, relative strength index shows whether a stock is considered to be overbought or oversold. How does this help you? Well, if you notice that a security is oversold, then it may be a good opportunity to buy. However, if the security is overbought, then perhaps it’s a good time to either exit or short the position, depending on you’re trading style.
RSI is generally expressed numerically between 0 to 100. A relative strength index of 30 or below would indicate that the underlying security is oversold. Anything over an RSI of 70 would indicate that the underlying security is overbought. RSI is considered to be a momentum indicator that can be considered for a number of reasons, most notably of which to confirm other indicators.
It goes without saying that if you’re a momentum trader, RSI review is a must.
TRADING TIP
Use RSI in conjunction with other indicators helping you review it in a perspective of "momentum".
5. STOCHASTIC OSCILLATOR
A momentum indicator that uses support and resistance levels to compare the closing price of a security to a range of prices it’s experienced over a specified time range. Much like the relative strength index, it measures on a scale from 0 to 100. Anything below 20 on the scale would point out that the security is oversold. If the scale reads above 80 than the underlying asset shows to be overbought.
What the stochastic oscillator tries to predict is price turning points. This indicator alone would not enough to execute a consistent and successful day trading strategy. It should be used in conjunction with other indicators that measure one of the other categories; trend, volume or volatility.
TRADING TIP
A good indicator used to confirm a bullish or bearish momentum based on previous closing prices of asset
We’ve gone ahead and listed the top 5 technical indicators, but that doesn’t mean there aren’t more. There isn’t a one size fit all in trading. That’s why it’s important to test out different indicators and different strategies to see what works for you. Keep in mind, what may work for you might not work for others. If you are a beginner, we strongly recommend you begin paper trading and get the practice necessary to discover which indicators give you consistent results. Happy Trading!
DISCLAIMER: This blog should in no way be confused for financial advice.
This is for information purposes only.
It is not intended to be financial advice, nor should it be taken as such.
Please consult a financial advisor for your specific situation.
