Best trading indicators day trading

The Three Most Popular Indicators for Day-Trading.

Price action and Macro.

This article is an extension of our previous two on the topic of short-term trading. Price action is an extremely common tool for day-traders’ (scalpers) risk management approaches. Moving averages and psychological support and resistance can assist with entry and trade management.

In our previous two articles, we took a detailed look at a short-term (day-trader) approach for trading in the forex market.

In How to Trade Short-Term we shared a simple strategy that traders can look to execute when a market may offer momentum opportunities.

In The Three Keys to Day-Trading , we took a look at some of the finer points of executing such a short-term approach.

In this article, we’re going to look specifically at indicators that are commonly used with a short-term strategy.

The first indicator is more than an indicator, and closer to a ‘field-of-study’ within technical analysis. Because trading on short-term time frames exposes traders to the complexity of ‘lag’ within a market, price action is one of the more popular ways of performing technical analysis with a short-term approach.

The reason this is so popular is because price action removes technical indicators from the equation and instead focuses on price and price alone. Price action can be used to grade trends, identify support and resistance levels, and to show traders potential entry opportunities in markets .

We outlined a simple structure for traders to become more familiar with the study of price action in the article Four Simple Ways to Become a Better Price Action Trader .

Where price action can come in as especially valuable for a short-term trader is in the realm of trade and risk and trade management. By noting price levels with which reversals or changes in market direction have taken place in the past, traders can look to place stops on positions so that if the market breaks against them (if a new low is put in while in a long position, or a new high while in a short position), the trade can be closed in an effort to mitigate the loss.

Price action can be a valuable tool for risk and trade management.

If the market does trend in the direction that you’re looking for, price action can also help with adjusting stops and profit-taking.

Short-term traders will often look to execute a quick break-even stop to remove their initial risk from the trade. And after prices do continue to move, traders can look at moving the stop even deeper in-the-money as the trade works in the trader’s favor.

My colleague Rob Pasche put together a phenomenal article on the topic of stop adjustments, entitled ‘The More Intelligent Trailing Stop,’ and this will walk you through using price action to adjust stops as the trade moves further in-the-money.

Another indicator that’s simple to use and attempts to marginalize the lag that is ever-present with the usage of indicators, the moving average is a common chart component of short-term traders.

The scalping strategy outlined in How to Trade Short-Term is centered on moving averages, and this can show you a couple of different ways to use this utilitarian indicator with a short-term approach.

Moving averages are commonly used for trend diagnoses, so that if prices are above the moving average the trend is diagnosed as being ‘up,’ and if prices are below the trend is considered being ‘down.’ This can work phenomenally with a multiple time frame approach in which trends are being graded on a longer-term chart (like the hourly or 4-hour), and entries performed on the shorter-term chart. We discuss using moving averages in this manner in the article Trading with Moving Averages.

Traders can also use moving averages to trigger into new positions. The moving average crossover is one of the more common ways of doing so and with this method; traders are simply looking for price to cross the moving average to initiate the position. The moving average trigger is investigated in more depth in the article Three Ways to Trade with Moving Averages .

The chart below was taken from the strategy shared in How to Trade Short-Term , in which moving averages are used to filter trends and enter positions; while price action is used for risk and trade management.

This strategy uses Moving Averages for trend filter and entry trigger, and price action for risk management.

Support and Resistance via Psychological Whole Numbers, and Pivot Points.

Have you ever been in a trade that’s working out great, only to see that up-trend stop dead-in-its-tracks? And after price struggles to continue moving up, it begins to oscillate before reversing and moving down.

This is the story of support and resistance, and to short-term traders this can take on extreme importance because failure to see ‘the bigger picture’ can lead to confusion and losses on the shorter-term charts.

There are numerous ways to identify support and resistance, and traders can use price action to validate any particular level; but this really only comes into play after-the-fact. Of particular interest to short-term traders are ‘psychological whole numbers.’

Psychological whole numbers are simply even, rounded values on the chart. As an example 1.3900, 1.3800 and 1.3700 are ‘round’ whole numbers in EURUSD, as each of these prices end in ’00.’ But we can take this a step further with the values mid-way between these three levels, 1.3850 and 1.3750 are also ‘rounded whole numbers.’

Take a look at the most recent move in EURUSD in the chart below, and notice how even in a strong-trending market the level of 1.3850 offered temporary support as the pair could not break through. Eight hours later that momentum came back in the market as the level finally yielded to selling, only to see 1.3750 come in as support shortly thereafter.

Psychological levels can have a huge bearing on price act ion.

Created with Marketscope/Trading Station II; prepared by James Stanley.

At this point, the pair has still failed to break below 1.3750 as support has come into the market after the most current 200+ pip run to the down-side.

Will every price ending in ‘50’ or ‘00’ elicit support or resistance? No. But short-term traders need to remain cognizant of the potential for support and resistance to develop at these values as trends move into new territory.

If a trend appears as though it may have run into a brick wall of support or resistance, traders can use this opportunity to scale out of a position, adjust stops, and or plan re-entries after prices finish retracing and continue moving in the trend-side direction.

--- Written by James Stanley.

Before employing any of the mentioned methods, traders should first test on a demo account. The demo account is free; features live prices, and can be a phenomenal testing ground for new strategies and methods.

James is available on Twitter JStanleyFX.

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Best Technical Indicators for Day Trading.

With loads of technical indicators, here's how to narrow it down to a few.

The MACD, RSI, moving average, Bollinger Bands, stochastics, and the list goes on, but what are the best technical indicators for day trading? Day traders need to act quickly, so trying to monitor too many indicators becomes time consuming, counter productive and is actually likely to deteriorate performance. When day trading--whether stocks, forex or futures--keep it simple. Use only a couple indicators, maximum, or not using any is fine too.

Consider these tips to find the best day trading indicator(s) for you.

Day Trading with Indicators or No Indicators.

Indicators are just manipulations of price data or volume data, therefore many day traders don't use indicators at all. Indicators aren't required for profitable trading. Practice trading based on price action and there is little need for indicators. That said, an indicator does help some people see things that may not be obvious on the price chart. For example, the price is trending higher, but it is losing momentum. To someone not used to reading price action (analyzing how the price is moving) this may be hard to see, but indicators can make it more obvious. Unfortunately, indicators come with their own sets of problems, signaling a reversal too soon or too late (see Don't Trade MACD Divergence Until You Read This).

Indicators aren't inherently bad or good, they are just a tool and therefore whether they are detrimental or helpful depends on how they are used.

Many Trading Indicators are Redundant.

Many indicators are almost exactly the same, with slight variations. One may be based on percent movements while another is based on dollar movement (PPO and MACD). Also, indicators may be part of the same "family." Examples of this include the MACD, stochastics and RSI.

While they may appear slightly different, usually just using one is enough. Having all three on your chart isn't going to improve the odds of your trades, because all these indicators are going to give you pretty much the same information most of the time.

Even a moving average (MA) and a MACD can give the same information. If you use a MACD (12,26) indicator and also add 12 and 26-period MAs to your price chart, the MACD indicator and MAs will tell you the same thing. In fact, all the MACD does is show how far the 12-period moving average is above or below the 26 period moving average. When the MACD crosses above or below the zero the line, that means the 12-period moving average crossed above or below the 26-period. If you added these indicators to your chart they would always confirm each other, because they are using the same input.

If you opt to use indicators, only pick one from each of the following four groups (if required, remember indicators aren't need to trade profitably). Even picking only one from each group could lead to redundancies and clutter, without providing additional insight.

Oscillators: This is a group of indicators that flow up and down, often between upper and lower bounds. Popular oscillators include the RSI, Stochastics, Commodity Channel Index (CCI) and MACD. Volume: Aside from basic volume, there are also volume indicators. These typically combine volume with price data in an attempt to determine how strong a price trend is. Popular volume indicators include Volume (plain), Chaikin Money Flow, On Balance Volume and Money Flow. Overlays : These are indicators that overlap the price movement, unlike a MACD indicator for instance which is separate from the price chart. With overlays you may choose to use more than one, since their functions are so varied. Popular overlays include Bollinger Bands, Keltner Channels, Parabolic SAR, Moving Averages, Pivot Points and Fibonacci Extensions and Retracements. Breadth Indicators : This group includes any indicators that has to do with trader sentiment or what the broader market is doing. These are mostly stock market related, and include Trin, Ticks, Tiki and the Advance-Decline Line.

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There is little need for more than one oscillator, breadth or volume indicator. You may find uses for a few overlays though, helping to indicate trend changes, trade levels and areas of potential support or resistance. Master using price action and overlays and you likely won't have need for the other types of indicators.

Combining Day Trading Indicators.

Consider picking picking one or two indicators to help with entries and exits, respectively. For example, an RSI could be used to help isolate the trend and entry points. In an uptrend, the RSI should be extending above 70 on rallies and staying above 30 on pullbacks. This simple guide can help confirm the trend, highlight trading opportunities, and see when the market may be changing trend direction.

A moving average, ATR Stops (Chandelier Exits) or Moving Average Envelopes could then be applied to the chart (overlays) to aid in exits. For example, one of these could be used as a trailing stock loss on trending trades. If the trend is up, look to exit if the price falls below the line (which will be below the price as the price rises).

This is just one example of how indicators can be combined. Which indicators are chosen depends on how a trader trades, and on what time frame. Calibrate each indicator (via the indicator settings) to the specific assets, time frame and strategy being traded. Default setting on the indicator may not be ideal, so alter them to make sure they give the best signals for the trades being taken. Indicator settings may require adjustments occasionally as market conditions change over time.

Final Word On the Best Indicator for Day Trading.

Unfortunately, there is no single indicator that is the best for day trading. Technical indicators are just tools, they can't produce profits. Profits require a trader to use their indicators and price analysis skills in the correct way (see Day trading False Breakouts). This takes practice. Whatever indicators you decide to use, limit it to one to three (or even zero is fine). Using more indicators is redundant and could actually lead to worse performance.

Know your indicator(s) well: What are its drawbacks? When does it typically produce false signals? What good trades does it miss (failure to signal)? Does it tend to give signals too early or too late? Can the indicator be used to trigger a trade, or does it just alert you too a potential trade (good timing or poor timing)?

Know those things about the indicators you use, and you will be on your way to using it more productively.

3 Most Useful Day Trading Indicators.

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 the plan itself.

In this article I will cover:

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 three 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.

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 Volume measures to see how popular the market is.

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.

Too much information can cause analysis paralysis which can keep you.

from making trading choices that are actually profitable ones.

Looking at just the trading range portion and price relation to the moving average, we have:

Price below longer term average means short Price above medium term means long Price above short term means long.

Not seen on this chart but the pivot black candle below #2 is actually a retrace into an area where a long trade was the call yet all trading indicators called to short at that time.

That is the main drawback with most trading indicators and that is since they are derived from price, they 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.

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

In order to explain how these can be useful as day trading indicators, take a look at this chart:

In brief, this is a pivot area where price broke through and rallied hard away from the moving average Price starts to trade above moving average as well as slope of indicator is up and our plan says trend is up Price returns to the area marked #1 (also a complex ab=cd retrace) Momentum indicator crosses and turns up and we buy stop the high of the candle that turned it.

Simple selection of trading indicators mixed with chart technicals can be the basis for your trading system.

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.

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, there are three indicators which I personally have had great success with over the years and is how I started.

My trading as evolved as I began to understand other aspects of the trading but these are where I started:

For the sake of consistency, I am going to use the same chart as I previously did. This is a day trading/swing trading chart of 1 hour on a Forex pair.

This zone was determined once the swing high was in place. It is a combination of the Fibonacci retracement and Fibonacci expansion (used for symmetry) This is the moving average used for objective trend determination. A short term setting will give you faster trend changes with more whipsaw. A longer term setting can have you miss a large portion of the current move Once the CCI comes close to or crosses the 0 level, a buy stop is place above the high.

You can see the trend is up and price has retraced into an area that I would be interested in taking a trade. Once price hits the area, there is a potential setup but a trade trigger is needed to get into the trade.

The commodity channel index plus price moving in the trade direction is the needed trigger.

I purposely left out exact rules and settings (hint – settings are standard) so you can design your own strategy using your current trading knowledge.

This exact setup is applicable to day trading, swing trading, and even position trading.

Moving average – Determine trend and can be part of the process in triggering in a trade and momentum plays. (both not described in this trading article) Fibonacci – Determine, in advance of price, zones I may be interested in for a setup and possible trigger. Can also be used for profit targets. CCI – Used for trade triggers but does have many uses including trend determination.

Does The Choice Of Trading Indicators Change?

As you can see, this list gives the 3 most useful trading indicators for me at a certain point in my trading.

Times change and what was useful then may not be useful for me today.

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.

CoachShane.

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4 Responses to “3 Most Useful Day Trading Indicators”

Al Lees July 23, 2014.

I do not trade futures. I am a swing trader in stocks and ETF’s. I am currently using MA, R, Stoch. and DMI. Sounds to me that I would benefit from use of your system.

Hi Al. Glad you enjoyed the read. As long as you are on the list for Netpicks, if I ever do a course on this topic you would be informed. Thanks for the interest!

Are these indicators recommended for YM and CL? thanks.

Sorry….I just saw your question. Indicators are just a tool and the ones presented in this trading article, have universal appeal. Try them out.

Picking the Right Chart Time Frame.

Do you think all indicators are created equal? No, but more importantly, not all indicators work the same way on all time frames. For example, lagging indicators like moving averages work best when there is less volatility. You would benefit highly from using a long period moving average on a daily chart compared to using the same configuration in a 5-minute chart of your favorite day trading chart software.

However, we do not want to impose any hard rules and convey the wrong message that there is any best time frame to day trade. You may have a higher patience threshold and prefer to use 15-minute charts, and I might have a lower patience threshold and prefer the 5-minute time frame.

While there are no hard-and-fast rules about which time frame you should use in day trading, you should consider a few things to make up your mind about picking the best time frame for yourself .

The first you should make up your mind when starting day trading is this: how much time would you devote to trading during the day? If you have a day job, you probably do not have much time to begin with and would likely spend only a few hours in front of the screen. On the other hand, if you are self-employed or run a small business, you will probably have a lot of free time to trade during the day.

So, the rule of thumb is that you should use a lower time frame when you would spend less time day trading. Similarly, you should use a higher time frame when you would be keeping an eye on the market throughout the trading day.

This is because when you are spending only a few hours in day trading, a 15-minute chart will only generate a few handfuls of bars and your day trading charting software, with all its advanced technical indicators, will have a hard time generating a proper signal with the limited data.

Figure 1: Comparison of a Bullish Move of Apple Inc. on 5-Minute and 15-Minute Chart Time Frame.

Instead, if you use a smaller time frame like the 5-minute chart, your day trading charting software will have the opportunity to analyze a lot of price data from enough bars and would be able to tell you which way the market is moving during that short period of time.

Moreover, when you are trading 8 hours a day and looking at lower time frames, you will have to analyze a lot of potential trading setups. As the number of trades goes up, as a human being, wouldn’t you feel tired of making so many decisions in a single day? The more you would trade, it is more likely that you will end up making more mistakes and give back the profits to the market.

If you are still not convinced, let me give you another reason to stick to the rule of thumb we just discussed. Your broker makes their profit by charging you commissions and from spreads. If you make 100 trades during the day and only end up making a few cents of profits on each of them, you are effectively paying a fortune to your broker in fees.

Do not end up working for your broker, take the time to analyze a trade properly, keep the number of trades low, and be a day trader – not a scalper.

Using On-Chart Indicators for Technical Analysis.

If you add a ton of different indicators, it may look terrific or ugly, depending on the colors – of course, but you will probably find it difficult to interpret all the different data at once. You do know that all technical indicators are based on calculating the price data, right?

Hence, taking a “less is more” approach would not only help you declutter your chart, but also make it much easier for you to interpret the on-chart indicators on your chart.

Figure 2: Apple Inc. 5-Minute Chart with Volume, 10 Period SMA, and ATR Indicators.

Personally, I strongly recommend that you keep the Volume indicator on your chart at all times. The volume is a secular on-chart indicator, it does not tell you which way the price would go. But, it will tell you if there are ample transactions in the market and whether the bigger players are involved when the price approaches a key breakout level.

In addition to the Volume indicator, I always keep the 10-period simple moving average (SMA) indicator on the chart. The 10-period moving average is one of the most popular indicators among day traders. It is fast enough to give an early indication and direction of a significant price move, but not too slow like the 20-period moving average that I would leave a large chunk of the profits on the table when the trend ends, or worse, reverses.

Besides these two EMAs, you would also find the Average True Range (ATR) indicator sitting at the bottom of my day trading charts. Because the ATR value gives you the accurate representation of the volatility based on the actual price of the stock and forces you to assess each stock on a case-by-case basis. Would you really think the volatility of Microsoft and Tesla would be the same if they had the same ATR reading?

You can also use a few other derivative indicators to know about the important support & resistance levels. For example, I have a plug-in which automatically plots the pivot points used by floor traders, and I draw the Fibonacci levels of important price swings manually.

Using Off-Chart Indicators in Day Trading.

While you would find the on-chart indicators to be essential for technical analysis, at the end of the day, charts and indicators are just sugar coated versions of the order flows that makes up the overall supply & demand in the market.

If you were a retailer, selling fruits, would you prefer to buy your stock from the wholesalers or the farmers themselves? Where would you get the best price? Of course, from the farmers.

In this analogy, if you would get the wholesale information about the market from technical indicators, you would get the best data from the Level II quotes. These quotes are the actual pending orders that other traders have placed with their brokers.

Figure 3: Apple Inc. Level II Data.

When traders place market orders to match these pending orders, these get filled. So, if you know that there are a lot of large pending buy orders below the current market price compared to sell orders, you can easily figure it out that if the support levels on your chart would hold the price or it would break below! Interesting right? You can explore about Level II here.

Figure 4: Apple Inc. Time & Sales Window on TradingSim.

When it comes to day trading, I also heavily depend on another off-chart indicator – the Time & Sales data. Tradingsim offers this data in the “Time & Sales Window,” which represents the traditional “Tape.” By combining the volume and tape data, you easily get a “feel” of the market. Watching the detailed information regarding the order flow on the “Time and Sales Window” and depth of the pending orders in the Level II window of a particular stock can really take your day trading skills to a new level.

Conclusion.

Success in day trading often boils down to the personality of the trader compared to how advanced the trading system he or she is using. That’s why, we always suggest that you keep things as simple as possible and focus on a few important indicators.

If you want, you can use a multi-screen trading setup and keep Tick Data, the spread between the S&P futures and the cash market, support & resistance, and Fibonacci levels of major stock indices like the S&P 500, etc. in a separate monitor.

However, always remember that the more information you have on the screen, the more time and energy it would require to analyze and process them. If you follow the advice given here and successfully match the right time frame, on-chart technical indicators, and tie the system with off-chart indicators, you would have a much better chance of becoming a successful day trader.