3 Day Trading Indicators You Should Learn About

Posted in: Swing Trading, Trading Article

Day trading indicators are often touted as the holy grail of trading but that is simply not true.

They are a useful trading tool that should be used in conjunction with a well rounded trading plan but are not and should not be the plan itself.

In this trading article, I want to cover 3 trading indicators that I find very useful in trading.

You will also learn how to see momentum on the chart and have a general area where you will look for trading setups.

These indicators are useful for any style of trading including swing and position trading.


Keeping Trading Simple

Whether you  swing trade, day trade, or even position trade, too many trading indicators equals complexity which usually equals lack of consistency with trading decisions.

Information overload is often the result of traders finding a mix of day trading indicators potentially useful but in fact don’t really help in the trader making a profitable decision.

I have used trading tools in different combinations over the years and there are a few that I found to initially be the most useful day trading indicators for how I like to trade.  As time went on, simple became my mantra and as a result, my trading decisions were clearer and were made with much less confusion and stress.

Trading indicators are just that – indicators.  They are not a trading method by themselves and traders should incorporate other variables such as price action and the structure that price leaves behind.

Over time, many traders do away with complications and trim their trading down to a few essentials.  This often means that the abundance of trading indicators they once used gives way to a more simplistic approach to the markets.


Day Trading Indicators Give Information About Price and Volume

Almost every charting platform comes with a host of indicators that those who engage in technical trading may find useful. You simply apply any of them to your chart and a mathematical calculation takes place taking into past price, current price and depending on the market, volume.

Different types of technical indicators do different things:

  • Trend direction
  • Momentum or the lack of momentum in the market
  • Volatility for profit potential – Is the market really moving?
  • Volume to see how popular the market is with other traders

The issue now becomes using the same types of indicators on the chart which basically gives you the same information.  While this may be explained as looking for “trade confirmation“, what it really does is give you conflicting information as well as more information to process.

A simple example is having several trend indicators that show you the short term, medium term, and longer term trend.  From a multiple time frame perspective, this may appear logical.

Many traders though can attest to seeing a perfectly valid setup negated because of a trend conflict and then watching the trade play itself out to profit.

Day Trading Indicators

Looking at this chart, the evolution of price and the lag of the moving average indicators can give day traders conflicting signals

  1. Price below longer term average means short
  2. Price above medium term means long
  3. Price above short term means long

The blue lines indicate trading opportunities which would either be skipped or have you on the wrong side of the market if you relied on the trading indicators for your decision making process.

The bottom example shows a consolidation with higher lows and momentum breaking to the upside.  The short term moving average, with price entwined with it, tells you this is price in consolidation.  The longer term moving averages have you looking for shorts.

Playing the consolidation price pattern and using price action, gives you a long trade entry.

The main drawback with most trading indicators is that since they are derived from price, they will lag price.

A trend indicator can be a useful addition to your day trading but be extremely careful of confusing a relatively simple trend concept.

Day Trading Question:  Day trading involves quick decisions.  Would your trading be better served by simple or complex information gathering? 


Useful Trading Indicator Selection

Useful is subjective but there are general guidelines you can use when seeking out useful indicators for your day trading, swing trading or even position trading.

One simple guideline is to choose one trend indicator such as a moving average and one momentum trading indicator such as the stochastic oscillator or RSI.

You must know what edge you are trying to exploit before deciding on which trading indicators to use on your charts. To add to that, you must also know how the indicator works, what calculations it does and what that means in terms of your trading decision.

For example, the idea that moving averages actually provide support and resistance is a myth.

Looking again at the chart above, when the moving average connects with price, what you are seeing is the average price not being as large as recent history and the moving average simply catches up to price.


Do Trading Indicators Work?

It all depends on how they are put together in the context of a trading plan. Some of the most used technical indicators such as moving averages, MACD, and CCI work in the sense that they do their job in calculating information.

For example, using several moving averages together like the alligator indicator, can quickly show you a market that is not only ranging, but also trending.

A golden cross or it’s cousin, the death cross, can show you trend direction and even act as a trade entry and exit signals

The power of the indicator lies in how you interpret the information as part of an overall trade plan.

Don’t be sold on the “holy grail” indicator that marketers flood your inbox with. Proper usage of basic indicators against a well tested trade plan through back testing , forward testing, and through demo trading is a solid route to take.

All of the systems that are offered by Netpicks not only come with tested trade plans but also hammer home that you must prove any trading system or trading indicator to yourself.


Threat Of Over-Optimization

There is a downside when searching for day trading indicators that work for your style of trading and your plan.

Many systems that are sold use standard indicators that have been fine tuned to give the best results on past data. They package it up and then sell it without taking into account changes in market behavior.

The backbone of many trading systems are very mechanical in the sense that “if A happens, do B”.

There is nothing wrong with optimizing to take into account current market realities but your approach and mindset in doing so can either have you being realistic or over-optimizing out of the realm of reality.

One way you may choose to not fall into the over-optimizing trap is to simply use the standard settings for all trading indicators.  This ensures you are not zeroing in on the most effective setting for the market of today without regard for tomorrow.


Small List of Useful Day Trading Indicators

As I mentioned at the start of this article, I’ve used many indicators over the years and still look at a few although they are never the actual reason for a trade.

Let’s take a look at 3 trading indicators and how they can apply to your own trading.

The RSI, Moving Average, Channel or Bands

  • RSI – Used to measure the momentum of a market
  • Moving Average Indicator – Can be used for trend or to see over-extended markets primed for pullbacks or mean reversion
  • Channels – Markets move in a rhythm and any move that breaks that rhythm can be cause for attention.

What I want you to take notice of is when the breaks either the 70 level or the 30 level.  This is not to take a reversal trade in “overbought” or “oversold” territory.  Markets have a way of staying in those conditions long after a trading indicator calls the condition.

moving average trading indicator

The moving average is not for trend direction.  What I want you to note is how far price moves away from the indicator, hugs the indicator, or “bounces” from the indicator

trading channels

Following an objective means to draw trend lines, simply copy and paste your first line to the other side of price.  Markets move in a rhythm and anything outside of that rhythm will cause a break of a trend line.  That can indicate that “something new” is coming to the market and we could be seeing a trading opportunity.


How To Use These Trading Indicators

I will first tell you how NOT to use these 3 trading indicators.  They will not be your ultimate decision making tool whether or not to enter a trade.  For that, let price action dictate and you may find this free Candlestick Reversal PDF useful in putting a trading plan together.

You will also want to determine what your trade trigger will be.

  • RSI will be used to show strong momentum.  If price breaks either the 70 or 30 level, we will be on alert for a trading setup in the same direction as the break
  • The moving average will be used for a general area – wide zone – where we will look for price to resume after a pullback.
  • The channels can be used for trade direction, signify change of trend, and depending on size of channel, used in the same manner as the RSI indicator

trading example

  1. RSI is in oversold which lets us trade short.  Price is far from upper line and moving average.  All we get are entries via breaks of consolidations.
  2. Price leaves oversold area (not a trading condition, just observation) and we get a break of upper line.  Price eventually gets momentum and pullback to zone of moving average.  We are on alert for shorts but consolidation breaks to the upside.  This is a trade you could position for due to the “something new” – break of channel and momentum in price
  3. RSI hit 70.  Price pulls back to the area around the moving average after breaking low of channel. After breakouts – generally see retests and we are looking for longs due to price trend.  Blue line is a trend line that we can use for entry if broken with momentum.  Price breaks back upside with momentum.
  4. 70 RSI and pullback.  Break to upside
  5. Price has broken longer term channel and formed a down sloping channel.  RSI had hit 70 and we are still looking for upside.  Price breaks channel, consolidation and upside momentum

You can see that we can see that any trading decision is made from price action.  The indicators frame the market so we have some structure to work with.

  • We were using the RSI indicator to show us a market that has momentum
  • We were using the moving average as a general location for some trades
  • We used the trading channels for trend, monitor breaks for momentum, and can use the breakout – pullback sequence to position in a trade


Does The Choice Of Trading Indicators Change?

As you can see, this list gives 3 trading indicators you can use in a manner that still allows price action to determine your trading.

You may eventually stop using the RSI and simply measure momentum by how far price is from the moving average.

The moving average may disappear from your charts and you will use the channels tops and bottoms as general zones for price to react at.

Every trader will find something that speaks to them which will allow them to find a particular technical trading indicator useful.

Whatever you find, the keys is to be consistent with it and try not to overload your charts and yourself with information.

Simple is usually best:

Determine trend – Determine setup – Determine trigger -Manage risk

This is an updated post with new trading information
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Trader at Netpicks
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

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