What Are The Best Indicators For Day Trading?

Every day, thousands of people flock to the Forex and stock markets, trying to squeeze a profit amid price changes that come into play. 

For millions of day traders, their strategy is to analyze the news and chart patterns, trying to predict the direction price is likely to move to profit from it.

In addition to analyzing news in fundamental analysis, traders also leverage various technical analysis tools to understand price action. 

Indicators provide insight into the prevailing market momentum, bearish or bullish, and can be used to ascertain the direction it is likely to move.

While indicators form the basis of technical analysis, they also generate buy and sell signals, providing ideal entry and exit points. 

However, in a pool of hundreds of tools, one is always sure to be spoilt for choice. While using one tool may not strengthen one’s edge in price determination, using several indicators at a time can only complicate analysis and lead to confusion.

Here are some of the best indicators for day trading.

Relative Strength Index (RSI)

Knowing the prevailing market condition is vital when trying to profit from short-term price changes as part of day trading. 

The Relative Strength Index is one of the best indicators for day trading that provides valuable insight on whether the market is overbought, signaling more buyers in the market, or oversold, signaling more sellers.

The indicator comes with readings of between 0 and 100. Whenever the indicator’s reading rises above the 50 level, it signifies a buildup in buying pressure. 

Consequently, day traders use this opportunity to eye potential buy positions as the price is likely to tick higher.

Chart showing RSI indicator in use

Use RSI to determine whether your chosen instrument is poised for a reversal. Great for both swing and continuation futures trades!

Likewise, whenever the indicator starts edging lower and tanks below the 50 level, it signifies bearish momentum, implying more short sellers in the market. Consequently, the price of an asset is likely to tank, providing an opportunity for day traders to eye short or sell positions.

The Relative Strength Index also provides valuable information on whether an asset is overbought or oversold, a warning sign of potential price reversal. Whenever the RSI reading is below 30, it implies the underlying price is oversold.

While the prospect of a security remaining oversold and continue losing value is usually high, the prospect of a bounce-back or reversal is also high. Conversely, whenever the RSI reading is below 30, day traders watch out for potential price reversal to the upward, acting as a signal to watch for buy positions.

Whenever the RSI reading is above 70, it implies an overbought condition. The prospect of price reversing and starting to edge higher is usually high during overbought periods. Consequently, day traders are usually on the lookout for entry levels to enter short or sell positions.

Moving Average Convergence/Divergence (MACD) Indicator

In addition to understanding the prevailing market momentum, it is important to have clear insight into the underlying trend. In day trading, the focus is usually on short-term price movements as traders open and close positions before the close of the day. 

The Moving Average Convergence/Divergence MACD stands out as one of the best indicators for day trading as it provides valuable information on the direction price is moving.

The indicator uses two moving averages, one fast-moving, and one slow-moving. For instance, one can use 26-period and 12-period exponential moving averages. 

The indicator also comes with a histogram that affirms the strength of the momentum. The 12-period EMA being the fast-moving, moving average, would be used to provide entry and exit signals.

Chart showing RSI indicator in use

Convergence and Divergence can mean the difference between losing trades and huge futures trading breakouts

Whenever the 12-period moving average of the MACD starts moving up and crosses the slow-moving 26-period moving average, it implies a build-up in buying pressure, suggesting that the price has bottomed out and is likely to start moving up. 

Once the histogram increases in size above the zero level, day traders interpret the same as a buy signal and consequently start to eye long positions.

On the other hand, when the 12-period moving averages start moving lower after moving up significantly and cross the 26-period MA, it implies a buildup in bearish momentum. 

Traders use this opportunity to eye sell positions as the prospect of price tanking is usually high.

Additionally, whenever the two moving averages are coming together, converging, it implies momentum is decreasing. If the price was trending up, the prospect of its reversing and moving lower is usually high. 

Similarly, when the two MAs diverge and move apart, it implies that momentum increases, signaling price is likely to move in the direction it was moving.

Fibonacci Retracement

While day trading, it is important to identify strong support and resistance points and levels where the price is likely to reverse and start moving in the opposite direction. The Fibonacci Retracement is one tool commonly used to identify such levels.

As a retracement tool, it identifies the degree to which the market is likely to move against its current trend. It comes with readings of 0%, 23.6%, 38.2%, 50%, 61.8%, and 100%, which act as levels of support or resistance depending on the direction price is currently moving.

For instance, it may reach a strong resistance level and start dropping whenever the price moves up significantly. In this case, the Fibonacci Retracement is drawn from where the uptrend started to where it appears to have ended.

Once the indicator is drawn, the 0%, 23.6%, 38.2%, 50%, 61.8%, and 100% levels will appear. As the price starts moving lower from the uptrend, the first line of support will be the 23.6% retracement. If the price does not hold above the level, it will tank to the 38.2% and the 50% level afterward.

chart showing Fibonacci retracement

Not sure which price levels you should be stalking to spot support and resistance? Take advantage of Fibonacci retracement!

In most cases, the price would often correct to the 61.8% level, which acts as a solid support level. It’s from here that accumulation would kick in. The 61.8% is considered a deep pullback acting as an ideal level to enter a long position, as an asset is deemed to be trading at a discount. The bounce-back that comes into play in the continuation of the long-term uptrend is usually high.

Similarly, suppose an asset is in a downtrend and starts bouncing back. In that case, most technical traders await a pullback to the 61.8% level to enter new sell positions in anticipation of price moving lower in continuation of the long-term downtrend.

On Balance Volume Indicator (OBV)

While day trading, it is important to know the direction big money is moving. Volume is one catalyst that drives price action, affirming whether large investors are long or short. Technical traders leverage the On Balance Volume indicator to profit from institutional investors' efforts.

Chart showing OBV confirming downtrend

Confirm trends with any futures trade in a matter of minutes, simply by looking at OBV!

Whenever the OBV indicator moves up, and the price also trends up, making higher highs and higher lows, it affirms strong upward momentum. The prospect of price moving up is usually high. Consequently, traders use this opportunity to eye long positions.

When both the OBV and price are making lower lows and lower troughs, it implies bearish momentum. Day traders use this opportunity to eye sell positions as the prospect of price tanking is usually high.

If the price is moving in a tight trading range, getting rejected at resistance and bouncing off support, and suddenly the OBV starts moving up, it implies accumulation is taking place. The prospect of price breaking through the resistance level and moving up is usually high; therefore, day traders eye long positions. Similarly, during a trading range and the OBV starts to drop, the prospect of price tanking and moving lower are usually high.

Chart showing OBV in divergence mode

In addition to MACD, OBV can help you spot divergence… which leads to advance notice on reversals that lead to long running trends!

However, whenever the price continues to make higher highs and higher lows while the OBV fails to make higher peaks, the likelihood of the upward trend to stall or fall is usually high as it implies negative divergence. Likewise, it implies positive divergence when the price makes lower lows and lower highs while the OBV is trending up. The prospect of price correcting and starting to move up is usually high.

Average Directional Index (ADX)

While analyzing the underlying trend using a moving average, it is also important to know whether the trend is strong enough to hold for some time. The Average Directional Index is one of the best indicators for day trading as it provides valuable insight into the strength of the underlying trend.

Chart showing ADX indicator

ADX is a quick way to confirm the trend you’re seeing on any futures chart without the fear of doubt or second-guessing.

It comes with readings of between 0 and 100. Whenever the reading is more than 25, it implies a strong trend. Consequently, if the price was moving up, the prospect of moving up for some time is usually high. If the reading is less than 25, it implies weakness in strength indicating waning momentum.

Consequently, when the ADX is rising, and the price is moving lower, it signals a strong downtrend, implying the price is likely to tank.

To see more indicators in action, visit our website here.

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