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.

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.

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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.

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.

Day Trading Indicators To Simplify Your Trading

Last updated on November 7th, 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 3 best trading indicators for day trading that I find very useful in trading.

You will also learn how to see momentum on the chart 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.

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 the 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 – 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

  1. Price below longer-term average means short
  2. Price above medium-term means long
  3. 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.

Day Trading Indicator Selection

Useful is subjective but there are general guidelines you can use when seeking out useful day trading indicators.

One simple guideline:

  • Choose one trend indicator such as a moving average and
  • Choose one momentum trading indicator such as the stochastic oscillator or RSI.

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.

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.

What Time Frame Is Best 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 lookback 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

The best technical indicators that I have used and are popular amongst other traders are:

  1. RSI – Relative strength index is one of the best momentum indicators for intraday trading
  2. Moving averages – Can help a trader determine the trend, overextended markets and are often used as dynamic support and resistance
  3. 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. What I want you to note is how far price moves away from the indicator, hugs the indicator, or “bounces” from the indicator

Trading Channels

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 – 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
  1. 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.
  2. 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
  3. 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.
  4. 70 RSI and pullback. Break to upside
  5. 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 may eventually stop using the RSI and simply measure momentum by how far price is from the moving average.

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.

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:

Determine trend – Determine setup – Determine trigger -Manage risk

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