What Are The Best Technical Indicators For Day Trading In Stocks?
When it comes to shares and stocks, day trading is an entirely different ballgame than long-term stock investment. Many people consider day trading to be a high-risk activity because it requires sharp acumen as well as profound stock intelligence to prevent major losses from day trading.
If you plan to try day-trading in stocks, then first and foremost, you must be thorough with the technical indicators for the correct analysis of stock performances. The best technical indicators for day traders are –
Relative Strength Index (RSI)
RSI suggests the overbought and oversold conditions by measuring the price fluctuations of a given asset. When the price momentum reaches 30 (on a scale of 0 to 100), it means that the asset is being oversold. Similarly, reaching the70 mark will indicate that the asset is overbought. The index was designed by J. Welles Wilder Jr, later revised by Constance Brown, CMT, who stated that the oversold in an upward trending market is much higher than 30. Similarly, the overbought in a downward trending market is much lower than the 70 score point.
Moving Average Convergence/Divergence (MACD)
MACD can be used to recognize the price trends more easily. This technical indicator consists of two chart lines.
The first line is,
MACD= 26 period EMA – 12 period EMA
Where EMA= Exponential Moving Average
EMA is the average price of an asset over a given period. Here, more weightage is given to the recent prices.
The second line is known as a signal line and is a 9-period EMA.
Other Technical Indicators
RSI and MACD are the most important technical indicators, but others too will help you gain a complete insight into the market movements. These will tell you about the price trends too.
Bollinger Bands
It is a lagging indicator that helps determine whether a given price is relatively low or high. It is a great indicator to understand volatility. Here, a middle line or simple band is determined by using a 20-day simple moving average. The top line is found by adding twice the daily standard deviation to the middle band. The bottom line is revealed by subtracting twice the daily standard deviation. The band helps to show the level of overbought and oversold along with trending price envelopes.
Exponential Moving Average
This is a lagging indicator used for finding the trends over time. This one gives more weightage to the current trends. It is one of the best ways to find the trends easily as it is quite sensitive to the recent price changes.
Stochastic Oscillator
It is a momentum indicator that is primarily based on the closing price trends. It helps in finding out the overbought and oversold levels. This one is a range-bound indicator that varies between zero and a hundred. The range can find signals when the line goes above 80 and below the 20 levels.
Fibonacci Retracement
It is a leading indicator that uses Fibonacci numbers to identify particular areas of price support or resistance along the given line between low and high prices. It also indicates areas where prices see a reversal or retraction to the previous trend.
Using pairs
Pairing up a set of two indicators on a price chart might help identify initiation points and get out of a trade. For example, one can combine RSI with MACD to reinforce a trading signal. Make sure that while selecting a pair, one of them should be the leading indicator while the other should be the lagging one. The former will generate signals before entering the conditions of the emerging trade. The lagging indicators would generate signals after the conditions have appeared and thus confirm the leading indicators. They help in preventing you from trading false signals.
- Multiple indicators
You might also choose to have multiple indicators – perhaps one of each type, like two leading and two lagging indicators. Multiple indicators help provide more trading signal reinforcement, reducing your chances of falling prey to false signals.
Conclusion
No matter which technical indicator you choose, it is imperative to conduct a meticulous and thorough analysis. The best way to understand is by monitoring for some time and note down their effectiveness over a given period. It is the perfect mix and match concept, wherein you will understand and choose what works best for you.
