Back to Blog3 Best Indicators For Trading
There is no doubt that day trading is fast-paced and very stressful. Though to navigate the intricacies of day trading and make informed decisions, traders may rely often on technical indicators. These indicators help identify potential trading opportunities and mitigate risk. Whilst there are thousands of indicators currently available, however, what are the best ones? Let’s focus on the top three that are widely used by traders.
Relative Strength Index (RSI)
The Relative Strength Index is a momentum-based oscillator that measures the speed and change of price movements. The oscillator ranges from the values of 0 to 100 and this assists traders to identify overbought and oversold conditions.
Overbought
When the RSI surpasses the value of 80, it suggests that an asset may be overbought, and in turn a reversal or correction could be imminent.
Oversold
Conversely, when the RSI drops below the value of 30, which indicates that an asset may be oversold, therefore signaling a buying opportunity.
Traders often use the RSI to confirm potential entry and exit points, especially in conjunction with other indicators like moving averages or trendlines. Market Spotter also has an indicator that encompasses the traditional RSI and other features that easily display pivotal points, entries and exits. The RSI Rocket is user friendly and great for day trading.
Moving Averages
Moving averages are crucial for day traders to use an additional tool in their toolbelt. Moving averages smooth out price data over a specified period of time, this helps identify trends. The two most popular moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
SMA
The SMA calculates the average price over a specified number of periods that can be set by the user. Day traders often use shorter-term SMAs, like the 9-period or 20-period to identify short-term trends. Longer period moving averages can be used for long term trends.
EMA
The EMA provides more weight to recent price data, making it more responsive to current market conditions. Traders often use shorter-term EMAs for day trading, like the 9-period or 12-period. In essence, by comparing short-term and long-term moving averages, traders can spot potential entry and exit points. One example is where a shorter-term moving average crosses over a longer-term moving average. A cross below may indicate a bearish trend, whilst a cross above may indicator a bullish trend. Market Spotter also has an indicator with 8 EMAs presented in a ribbon that signals entry and exit opportunities and confirms trends. This is called the Turbo Trend indicator and can be used on all time-frames.
Average Direction Index (ADX)
The ADX is a versatile indicator that measures the strength and direction of a trend. It consists of three lines, the ADX, DI- (Negative Directional Index) and DI+ (Positive Directional Index), let’s break these down:
ADX: The ADX line measures the overall strength of a trend. A rising ADX suggests a strengthening trend, whereas a falling ADX may indicate a weakening trend or consolidation of price.
DI+ & DI: These lines help determine the trend direction. When DI+ crosses above DI-, it signals a potential bullish trend, and when DI- crosses above DI+, it suggests a potential bearish trend. This indicator is great for spotting trend opportunities and avoiding choppy or sideways markets.
In all, day trading relies on a combination of technical indicators, risk management and discipline. While these three indicators are among the top choices for day traders, it’s important to remember that no single indicator can guarantee profit.
