What are the best indicators for day trading?
Most traders gravitate towards short-term trades over swing trades. This is understandable since it’s not easy to stomach fluctuations in prices for a long period.
Also, swing trading brings forth additional fees called swap which brokers charge for a trade opened for more than one trading day.
Therefore, there’s a great demand for the best indicators for day trading and this list contains the very best.
What is Day Trading in Forex?
To start with, the forex market opens at 9 PM UTC and closes at 10 PM UTC every day. Positions that are opened and closed within this time window are intraday trades.
Day trading in any financial market covers every trading activity (either a buy or sell order) that is executed and closed before the end of a trading day.
However, day trading should not be mistaken for scalping. Scalping is quite different as profits are aimed to be made 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’. This bias is attained through different types of analysis, 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. By deciphering these charts, the direction of the market can be predicted. This practice is known as technical analysis.
Technical analysis has evolved with varieties of methodologies out there. Nonetheless, trading with indicators is inclusive of this concept.
Trading Indicators
Indicators are tools that predict the direction the market might be headed. It is achieved by different formulas peculiar to each indicator. There are two types of indicators, and they are; leading and lagging indicators.
Most indicators simply display past data/ price action, there are known as lagging indicators. Contrarily, 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.
The Top Indicators for Day Trading
#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” prices and “predicts” the market’s future direction. Moving averages are lagging indicators by nature as they simply display 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.
The period can be changed to various values depending on the need. 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.
#2. Relative Strength Index
The relative Strength Index is a momentum oscillator that measures the speed and change of price movements. It was developed by J. Welles Wilder.
The magnitude of recent closing prices is measured and used to predict reversals; changes in trends.
The RSI indicator predicts these reversals by plotting readings in overbought and oversold regions within a range of 1-100.
As mentioned above, when the RSI plots a value above 70, the commodity is overbought. Most likely bullish pressure cannot be maintained anymore and this is a sell signal.
RSI readings below 30 signify the currency pair has been oversold. In most cases, a bullish reversal occurs.
#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. This trade will be closed when the indicator displays three consecutive dots above the candlesticks.
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.
#4. Bolinger Bands
The Bollinger Bands was created in 1980, named after the man who created it, John Bollinger. It isn’t an indicator that’s on the popular side but it gets the job done.
This indicator utilizes a moving average and two trading bands above and below it.
Additionally, they measure volatility and use it to adapt to market conditions; overbought or oversold conditions.
Prices are thought to be overbought when it hits the upper band while it is oversold when the price touches the lower band.
The upper and lower bands contract and expand in relation to price action. In volatile market conditions, the bands contact. As opposed to that, during a ranging market, the bands contract.
The middle line of the Bollinger band is typically a simple moving average usually set to 20 bars. As always, this period can be adjusted to suit your trading plan.
#5. Stochastic Oscillator
The stochastic compares recent closing prices of a currency pair, stock, etc. to the highest and lowest prices during a specified period.
These changes in price during this period are used to predict potential reversals.
Just like the RSI, the stochastic indicator also has overbought and oversold regions bounded within a scale of 1-100.
Generally, sells are taken in the overbought region while buys are taken in the oversold region.
#6. MACD
MACD stands for Moving Average Convergence Divergence. It is a trend following momentum indicator. Therefore, stick to trending markets and avoid ranging markets.
This indicator has two lines and a histogram which comes in handy. Typically, the MACD is traded when these lines cross one another, this is referred to a crossover.
#7. ADX
Trading trends is important to all forex traders, the ADX indicator measures the strength of trends.
Further, the ADX is a trend indicator although it is non-directional. It is non-directional because it merely shows the strengths of trends and not the direction of these trends.
The ADX (average directional index) indicator is a type of oscillator. Just like other oscillators, its readings are graphed on a scale of 1-100.
Which Is The Best Indicator For day trading?
For day trading, the moving average indicator is a solid pick. There are two types of moving averages, the exponential moving average (EMA) being one of these. The exponential moving average is calculated similarly to the simple moving average.
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.
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 which 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.
Typically, as a day trader, the smaller timeframes like the 5mins to as high up to the hourly timeframe are traded.
So, all indicators used should never have large periods for more precision. The settings should be tweaked to lower periods suitable for these timeframes.
Related
Summary; Best Indicators For Day Trading
There are so many indicators out there and it can be conflicting to choose the right one for you. On a forex chart, there shouldn’t be more than three trading indicators. Way too many indicators make charts clustered and quite busy.
Traders can use indicators solely for day trading or integrate them alongside price action. The latter isn’t as common as traders tend to choose one of the means of technical analysis over the other.