Last updated on June 5th, 2020
Day trading indicators 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 what I think are the best trading indicators for technical analysis in day trading that I find very useful
You will also learn how to see momentum on the chart, trend direction, 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.
What Do Day Trading Indicators Tell You
Almost every commodity trading charting platform comes with a host of the top 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 the past price, current price and depending on the market, volume.
Different types of trading indicators do different things:
- Long and short term 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 trends. 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.
Looking at this chart, the evolution of price and the lag of the moving average indicators can give day traders conflicting signals
- Price below longer-term average means short
- Price above medium-term means long
- Price above short term means long
The blue lines indicate day trading opportunities that 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 the 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 day trading trend indicator can be a useful addition to your day trading but be extremely careful of confusing a relatively simple trend concept.
What Technical Indicators Should You Use
Technical analysis with intraday trading can be tough and the right indicator can help make it a little simpler.
Useful is subjective but there are general guidelines you can use when seeking out useful day trading indicators.
3 simple guidelines:
- Choose one trend indicator such as a moving average and
- Choose one momentum trading indicator such as the stochastic oscillator or RSI.
- Perhaps use one of the important weekly moving averages but this is something you may want to skip to avoid clutter
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 really a myth. Head to any online Forex forum and that is repeated constantly.
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 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 backtesting, forward testing, and 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 is 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.
Best Time Frame For Day Trading
The best time frame of 5-15 minute charts for trading is what is popular with traders. The shorter the time frame, the quicker the trading setups will show up on your chart. Best is subjective and will depend on your trading strategy and available time to day trade.
Is There A Best Intraday Indicator Setting?
There is no best indicator setting and the setting you use will determine how sensitive the trading indicator is to price movement. A longer look back period will smooth out erratic price behavior. A short look back period will be more sensitive to price.
Notice what happens when I change the RSI indicator on a 5-minute chart from a 20 period to a 5 period faster setting on the graphic above.
Best Technical Indicators For Day Traders
Whether you are looking for a Forex trading indicator or an indicator for stock trades, there are a handful that are used a lot.
The best technical indicators that I have used and are popular among other traders are:
- RSI – Relative strength index is one of the best momentum indicators for intraday trading
- Moving averages – Can help a trader determine the trend, overextended markets and are often used as dynamic support and resistance
- Channels – From Donchian Channels to trend line channels, these can help a trader see a change in the rhythm of the market.
Let’s take a look at 3 trading indicators and how they can apply to your own trading.
Intraday Trading – RSI
What I want you to take notice of is when the breaks either the 70 level or the 30 levels. 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.
20 Period Moving Average
The moving average is not for trend direction although you can use it for that purpose. What I want you to note is how far price moves away from the indicator, hugs the indicator, or “bounces” from the indicator
Following an objective means to draw trend lines, simply copy and paste your first line to the other side of the price. Markets move in 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 Indicators For Day Trading
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 when using the following indicators:
- RSI will be used to show strong momentum. If price breaks either the 70 or 30 levels, 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 of opportunity- where we will look for price to resume after a pullback.
- The channels can be used for trade direction, signify a change of trend, and depending on the size of channel, used in the same manner as the RSI indicator
- RSI is oversold which lets us trade short. Price is far from the upper line and moving average. All we get are entries via breaks of consolidations.
- Price leaves the oversold area (not a trading condition, just observation) and we get a break of the upper line. Price eventually gets momentum and pullback to the 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
- RSI hit 70. Price pulls back to the area around the moving average after breaking the low 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.
- 70 RSI and pullback. Break to upside
- 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 a 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 don’t need to spend too much time looking for some indicators for Forex trading and some for futures. We still want to be able to see what price is doing.
You may eventually stop using the RSI and simply measure momentum by how far price is from the moving average. Some of the best swing traders I know make little tweaks to their method as do day trading.
The moving average may disappear from your charts and you will use the tops and bottoms of the channels as general zones for the price to react at.
The most important indicator is one that fits your strategy. 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 are to be consistent with it and try not to overload your charts and yourself with information.
Simple is usually best: