Most traders in the foreign exchange market lean towards scalping/ day trading. Therefore, there’s a large demand for the best indicators for day traders and this list contains the very best.
Swing trading delivers a large number of returns- pip-wise, but trades have to be held for multiple days/weeks which isn’t suitable for everyone.
Also, swing trading brings forth additional fees called “swap” which brokers charge for holding a trade for more than one trading day.
Day Trading in Forex
To start with, the forex market opens at 9 PM UTC and closes at 10 PM UTC every day. Any position opened and closed within this time window are intraday trades.
By definition, day trading is every trading activity (either a buy or sell order) executed and closed before the end of a trading day.
However, scalping is way different from intra-day trading. While scalping, profits in as LITTLE time as possible. The average hold time for these trades rallies between seconds to a few minutes.
What are Trading Indicators?
Every trader makes trading decisions based on ‘speculation’. Through different types of analysis, this bias is attained. They are; fundamental analysis and technical analysis.
The forex market involves the exchange of different currencies. As we all know, the strength of each currency varies due to certain factors (interest rates, inflation, etc.).
These factors are analyzed in order to develop a bias to speculate the strength of one currency against the other.
Alternatively, there are arrays of charts that plot the strength of these currencies against one another. The direction of the market is predicted by deciphering these charts. This practice is commonly known as technical analysis.
Technical analysis has evolved with varieties of methodologies out there. Nonetheless, trading with indicators is inclusive of this concept.
A lot of forex traders use indicators because they are powerful tools. They predict the direction the market is headed. Each indicator achieves by different and unique formulas. There are two types of indicators, and they are; leading and lagging indicators.
Most indicators simply display past data/ price action. Because of this sluggishness, they are lagging indicators. Contrary, leading indicators give signals that predict future pricing.
In simpler terms lagging indicators simply display the present market’s outlook while leading indicators predict future outcomes.
Best Indicators for Day Traders
#1. Moving Averages
Doubt there’s any trader out there that hasn’t tried out the moving average indicator before. It is no surprise that it is the most used forex indicator.
The moving average indicator calculates the mean of the previous close prices in a given time frame.
Basically, it “smoothens” price and “predicts” the market’s future direction. By nature, moving averages are lagging indicators as it simply displays previous activity.
There are two types of moving averages which are; simple and exponential moving averages. Both of these serve the same purpose but to different degrees.
A simple moving average reacts slower to price compared to the exponential moving average.
Depending on the need, the period of a moving average can be changed to various values. In this case, a moving average of a small period should be used here.
To trade the moving average a long order is opened when the indicator crosses the price upward. When there is a downward cross, it is a sell signal.
In the chart that follows, a visual example of this is shown.
#2. Stochastic Oscillator
Technical indicators measure different variables of the market and display this data as information. In the case of the stochastic oscillator, it measures the market’s momentum.
What it does is, it compares recent closing prices of a currency pair, stock, etc. to the highest and lowest prices during a specified period.
The changes in price in this period are used to predict potential reversals.
Of course, the time period can be changed by reducing or increasing its value.
When the change is applied, the sensitivity of the stochastic differs.
By giving signals between the range of 1-100, the market can be accessed. Generally, sells are taken in the overbought region while buys are taken in the oversold region.
#3. Parabolic SAR
The suffix in the indicator’s name stands for ‘stop and reverse’. The parabolic SAR is a distinct type of oscillator but unlike the others, it doesn’t display signals through values.
Instead, this indicator places a series of dots on a chart that appears below and above candlesticks.
For instance, in an upward market, the SAR will appear below candlesticks showing bullishness. The chart below shows three entries using the SAR indicator.
Three consecutive dots above the candlesticks indicate a reversal so the trade is closed when that happens.
Although these dots tend to appear quite frequently so a 100-MA moving average can be used to determine the market’s overall trend; trades are filtered out that way.
The parabolic SAR is strictly a trend trading indicator so choppy/ ranging markets should be avoided. If not, a lot of fake signals will suffice. Mostly losses will be taken and trades and signals with little profit will be given.
Related: Three Best Indicators For Swing Trading
Which EMA is best for Intraday?
There are two types of moving average, the exponential moving average (EMA) being one of these. The exponential moving average and simple moving average are calculated relatively similarly.
However, the exponential moving average is way more sensitive to price action. This feature makes it perfect for intraday as entries are improved.
But on the flip side, this leaves traders exposed to more fake-outs due to sensitivity. Since lower time frames will be traded, the period of the EMA has to be set low.
Additionally, a popular method is two use of two moving averages. One with a low period and the other with a large period. The latter serves as a trend indicator, to learn more about trading moving averages click here.
Trading indicators are great for simplifying forex charts. Opening a naked chart feels overwhelming for amateur traders. Hence, indicators give a sense of direction by simplifying the market’s information.
Each indicator displays signals by reading a particular metric. Which can be momentum, previous price closes of candles, etc.
Therefore, it makes more sense to pair a couple of indicators to view the market from different perspectives. This way, more confirmation is acquired so accuracy is achieved.
On average, most day traders use 2-3 indicators simultaneously with the moving average being the most used.
A lot of pro traders including those who mainly trade price action tend to adopt a few indicators. In this case, the indicators are just used for further confirmation. A good one is the volume indicator that can be used to measure the market’s momentum.
Differently, other pro traders use only indicators and that’s just fine. Remember the forex market is dynamic and there isn’t one correct method to trade it.
Summary: Three of The Best Indicators For Day Traders
The key to being successful with indicators is to find specific ones that suit your profile as a trader. The reality is, that it is achieved through backtesting only.
Afterwards, combine two indicators that fortify each other’s strengths- as well as weaknesses. Patience has to be exercised at this phase to find the right mix.
Also, the settings of each indicator can be tweaked to better suit its purpose.