2 Simple Indicators for Day Trading

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2 Simple Indicators for Day Trading

If you trade stocks or stock indices (or related products) here are two very simple indicators which will help you decide in which direction you should be trading.

Open Price Indicator: Current price – Open price

The Open Price Indicator (OPI) is a simple calculation that lets you know whether buyers or sellers are stronger during the day.

If the Current price is above the open price (positive OPI), the buyers have the advantage.

If the Current price is below the open price (negative OPI), the sellers have the advantage.

Ideally trade in the same direction as the OPI; if OPI is positive only take long positions when your entry signals occur. If the OPI is negative only take short signals when they appear.

The OPI acts as a filter. It lets you know in which direction you should be taking trades.

When the OPI flips from positive to negative, or negative to positive it can act as a trade signal. Buy when the OPI goes from negative to positive; sell (buy puts) when the OPI goes from positive to negative. Finding the exit will be up to you.

Net Price Indicator: Current price – Prior Close price

The Net Price Indicator (NPI) is another simple calculation which shows whether buyers or sellers are in control from one day to the next. The last closing price was the consensus price for traders yesterday. If the current price is above the prior close (positive NPI) it shows buyers are in control. If the current price is below the prior close (negative NPI) it shows sellers have stepped it up.

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Ideally trade in the direction of the NPI; if NPI is positive only look for long positions; if the NPI is negative only look for short positions.

When the NPI flips from positive to negative, or negative to positive it can act as a trade signal. Buy when the NPI goes from negative to positive; sell (buy puts) when the NPI goes from positive to negative. Finding the exit will be up to you.

Combining the Indicators

The greatest confirmation comes when you are taking day trades in the direction of both OPI and NPI. When OPI and NPI are positive it shows that the buyers are strong and pushing the price up since the prior close and since todays open. When both these indicators are positive, your primary focus should be on finding long positions based on an established strategy.

When both the indicators are negative, your primary focus should be on finding short (put) positions based on an established strategy.

Except for when the indicators flip from positive to negative, or vice versa, these indicators are not trade signals. They simply tell you in which direction you should be trading.

When using the indicators for trade signals, look for confirmation. If the one indicator moves from positive to negative, indicating a sell, the signal is stronger if the other indicator is already negative or also crossing into negative territory. When an indicator crosses from negative to positive, indicating a buy, the signal is stronger if the other indicator is already positive or also crossing into positive territory.

The Final Word

NPI and OPI give you a quick assessment of how the price is performing compared to yesterday’s close and today’s open. They show you which side of the market is most favorable for extracting a profit–the long side or the short side. Finding an entry and exit, as well as controlling risk is up to you. The indicator does provide the occasional trade signal when one of the indicators flips from positive to negative, or vice versa. Ideally use the indicators in combination, as signals are more powerful when both indicators confirm each other.

Day trading indicators are important tools every trader needs. When you’re day trading, you have to be able to make split second decisions. Those decisions can be the difference between profit and loss.

What Are the Best Indicators for Day Trading?

  1. Here are some of the best indicators for day trading:
  2. Candlesticks are the best trading indicator.
  3. Stock volume is important for liquidity.
  4. Moving average lines: good for support and resistance levels.
  5. VWAP: important intraday indicator.
  6. Level 2: shows the different bid/ask levels.
  7. Time and sales: shows the order flow.
  8. RSI: shows overbought and oversold levels.
  9. Bollinger bands: visual overbought and oversold levels.
  10. Previous close: another popular support and resistance level.

Technical indicators can help slow down the noise of price movement. However, too many day trading technical indicators can make your charts messy and hard to read.

It’s all about finding a few that work without loading down your charts. Read our post on how to read stock charts for beginners if you’re new or need a refresher. Charts are the bread and butter of trading.

1. Basics of Day Trading Indicators

The stock market is a tug of war between buyers and sellers. As a day trader, you’re buying and selling stocks within seconds or longer. Depending on your strategy, you’re apart of that fight as a buyer or seller.

Day trading indicators aren’t bad or good. You’ll hear people swear by them and people who hate them. They are there as a tool and nothing more.

One thing indicators are good for is signaling reversals or giving help with buy and sell signals. Technical indicators are used to predict future trends. It’s important to remember that they’re not a crystal ball.

Above all, they’re tools. When used properly, they give confirmation as well as a guide. Of course you can’t have indicators by themselves. You also need candlesticks.

Candlesticks are the foundation of technical trading. It’s when candlesticks are coupled with technical indicators that the bigger picture is painted. It’s important to know what bullish candlesticks, bearish candlesticks and doji candlesticks mean and look like.

Day trading indicators in moderation is key. All you need are 2-4 indicators that you’re comfortable with.

2. MACD

MACD also known as the Moving Average Convergence Divergence can be used as an indicator. This is a momentum indicator that follows the trend. It functions as a tool for buy and sell signals.

MACD crossovers are a popular day trading strategy. When the MACD falls below the signal line it’s seen as bearish. Conversely, when it crosses above the signal line it’s bullish,

In other words, when the MACD crossover is bearish, if you’re long, then it is a signal you might want to sell. The opposite is also true. A bullish MACD crossover is a buy signal.

3. Moving Average Lines

Moving average lines are also day trading indicators. In fact, moving averages are really popular trading indicators. They smooth out price movement from all the fluctuations.

You have simple moving averages and exponential moving averages. The simple moving average formula forms over a defined period of time. Whereas, the exponential moving averages give more importance to recent price changes.

Moving average crossovers are also strong buy and sell signals. You’ll notice that price tends to stick close to moving average lines, especially when the stock market or certain stocks are trading sideways.

Moving averages also push price up or down depending on the trend they’re in. When price moves away from the moving average lines, they always gravitate back to them.

Moving average lines provide equilibrium to stocks as well as provide support and resistance. The VWAP trading strategy is also a popular strategy among day traders.

This is the 1 minute chart for Alibaba. There are 4 moving average lines on here. The 9 and 20 exponential moving averages as well as the 50 and 200 simple moving averages.

4. Day Trading Indicators Include Relative Strength Index (Rsi)

The RSI or Relative Strength Index is an indicator that tells you when a stock is overbought or oversold. An over extended stock will correct itself.

Another thing to remember is that when a stock trades in an oversold or overbought range, it’s also confirmation of the strength of the current trend.

It’s a popular momentum indicator because it compares gains and losses over a specified period of time. Hence, the confirmation of a trend’s strength.

Which Time Frame is Best For Day Trading?

  1. Here are some of the best time frames for day trading:
  2. 1 Minute: best for entries and quick scalps.
  3. 5 Minute: good for slower intraday setups.
  4. 1 Hr: good for longer intraday setups.
  5. Daily: key for breakouts.

1. Bollinger Bands Are Day Trading Indicators

Bollinger bands are another form of day trading indicators. There is an upper and lower band that form above and below candlesticks. The more volatile the stock, the wider the bands get.

On the other hand, the less volatile the closer the bands come together. When the bands squeeze, traders see it as a signal for future volatility. Volatility is the the bread and butter of day trading.

Without volatility, price wouldn’t move much. We teach day trading live each day within our trading service.

2. Patterns

Patterns are a huge part of stock trading. When patterns are coupled with day trading indicators it gives traders a clear picture of an upcoming move. Patterns do break down all the time so, of course, it isn’t a crystal ball.

When day trading indicators are bullish and the patterns are bullish, you have the confidence to go long in a trade. The opposite is also true. If you see tweezer top patterns and the indicators are going bearish, you know to get out of a trade or take the short side.

Patterns and indicators when used properly give you a great chance to be a successful trader.

Which Technical Indicator is the Most Accurate When Trading?

  • Which technical indicator is the most accurate when trading? Candlestick patterns are the most reliable trading indicator. Most trading indicators like moving average lines, rsi, and macd are lagging indicators, while price action is a real-time indicator.

Bottom Line on Day Trading Indicators

Day trading indicators are tools to be used for confirmation. Some traders like them and some don’t. There’s no right or wrong on what indicators you do or don’t like. Technical indicators don’t produce profits. It’s you as a trader, taking the time to learn, study and practice.

The Best Technical Indicators for Day-Trading

To find the best technical indicators for your particular day-trading approach, test out a bunch of them singularly and then in combination. You may end up sticking with, say, four that are evergreen or you may switch off depending on the asset you’re trading or the market conditions of the day.

Regardless of whether you’re day-trading stocks, forex, or futures, it’s often best to keep it simple when it comes to technical indicators. You may find you prefer looking at only a pair of indicators to suggest entry points and exit points. At most, use only one from each category of indicator to avoid unnecessary—and distracting—repetition.

Combining Day-Trading Indicators

Consider pairing up sets of two indicators on your price chart to help identify points to initiate and get out of a trade. For example, RSI and moving average convergence/divergence can be combined on the screen to suggest and reinforce a trading signal. 

The relative strength index (RSI) can suggest overbought or oversold conditions by measuring the price momentum of an asset. The indicator was created by J. Welles Wilder Jr., who suggested the momentum reaching 30 (on a scale of zero to 100) was a sign of an asset being oversold—and so a buying opportunity—and a 70 percent level was a sign of an asset being overbought—and so a selling or short-selling opportunity.   Constance Brown, CMT, refined the use of the index and said the oversold level in an upward-trending market was actually much higher than 30 and the overbought level in a downward-trending market was much lower than 70. 

Using Wilder’s levels, the asset price can continue to trend higher for some time while the RSI is indicating overbought, and vice versa. For that reason, RSI is best followed only when its signal conforms to the price trend: For example, look for bearish momentum signals when the price trend is bearish and ignore those signals when the price trend is bullish.

To more easily recognize those price trends, you can use the moving average convergence/divergence (MACD) indicator.   MACD consists of two chart lines. The MACD line is created by subtracting a 26-period exponential moving average (EMA) from a 12-period EMA. An EMA is the average price of an asset over a period of time only with the key difference that the most recent prices are given greater weighting than prices farther out.

The second line is the signal line and is a 9-period EMA. A bearish trend is signaled when the MACD line crosses below the signal line; a bullish trend is signaled when the MACD line crosses above the signal line.

Choosing Pairs

When selecting pairs, it’s a good idea to choose one indicator that’s considered a leading indicator (like RSI) and one that’s a lagging indicator (like MACD). Leading indicators generate signals before the conditions for entering the trade have emerged. Lagging indicators generate signals after those conditions have appeared, so they can act as confirmation of leading indicators and can prevent you from trading on false signals. 

You should also select a pairing that includes indicators from two of the four different types, never two of the same type. The four types are trend (like MACD), momentum (like RSI), volatility, and volume.   As their names suggest, volatility indicators are based on volatility in the asset’s price, and volume indicators are based on trading volumes of the asset. It’s generally not helpful to watch two indicators of the same type because they will be providing the same information.

Using Multiple Indicators

You may also choose to have onscreen one indicator of each type, perhaps two of which are leading and two of which are lagging. Multiple indicators can provide even more reinforcement of trading signals and can increase your chances of weeding out false signals.

Refining Indicators

Whatever indicators you chart, be sure to analyze them and take notes on their effectiveness over time. Ask yourself: What are an indicator’s drawbacks? Does it produce many false signals? Does it fail to signal, resulting in missed opportunities? Does it signal too early (more likely of a leading indicator) or too late (more likely of a lagging one)?

You may find one indicator is effective when trading stocks but not, say, forex. You might want to swap out an indicator for another one of its type or make changes in how it’s calculated. Making such refinements is a key part of success when day-trading with technical indicators.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

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