Tools of the Trade: Essential Technical Indicators for Day Trading

Whether you’re an absolute beginner trading in your pyjamas or the Wolf of Wall Street himself, there are basic intraday indicators that should be a part of your daily routine. Trading strategies change with time and evolve according to your targets, current events, or a multitude of other factors., so being able to identify and interpret useful trading indicators will allow you to maximize your profits, which is the whole point here, right?

Basically, trading indicators are tools that will allow you to:

  • Identify the general trend of the market and individual holdings
  • Recognize potential profits to be made as a result of market volatility
  • Assess the popularity of particular stocks by observing their trade volumes
  • Predict the future movements of individual holdings

Let’s get right into it.

1. Moving Averages

Day traders will be familiar with daily moving averages (DMAs), which are the lines on a stock chart that connect all through the daily closing prices of a holding over a specific time period. The longer this period is, the more reliable your moving average will be. The reason this is an effective indicator is the fact that stock prices move up and down from day to day. By getting this average, you smooth out the trend and get a better sense of the general, overall movement, which is essential for long-term planning.

Application

Say you’re a trader keeping an eye on your averages. Should you notice that short-term averages are outperforming long-term averages as reported by Admiral Markets or any other trading platform you’re using, then this will indicate that the market is on an upwards trend (bull market). You can make a decent profit on your investment here using such strategies as making a buy call with a stop loss order on the long-term moving average.

2. Bollinger Bands

This indicator builds on the moving average. It comprises three lines in total – the moving average itself, a lower limit, and an upper limit. What is represented by these lines is the standard deviation of the stock, or how much the stock moves in either direction away from its average.

Application

Should a stock currently stand below the lower band of the Bollinger band, it will likely rise in future, so a trader can make a profit by buying it. Should it be over the upper band it will likely fall in future, so selling might be the best way to avoid losing money on it.

3. Momentum Oscillators

We know that stock prices will move up and down from day to day. Even so, there are days when they will undergo short-period cycles entirely unrelated to whether the market trend is going up or down (bull or bear market). Such scenarios can easily be missed by a trader, and that’s where this indicator comes in handy. The indicator will depict the stock’s momentum in a range of 0 to 100, which enables traders to figure out whether the rise will continue or not. It’s particularly useful when a stock hits a new high or low, to understand whether the market has changed its opinion of the stock, perhaps due to some current developments or market shifts.

Application

If the stock in question has hit a historical high and the oscillator level isn’t the same, it means that demand is decreasing, which might eventually lead to a fall in the stocks’ price. The opposite scenario holds true for stock rises.

4. Relative Strength Index (RSI)

This stands as one of the most useful tools for understanding the significance of share price rises and drops. The information is presented in index form to derive a score ranging from 0 to 100. As the price rises, so will the index and the reverse will happen as the price falls. Once a trader sees the index rise or fall to a certain limit, it will signal time for the trader to re-evaluate that particular stock’s trading strategy.

Application

Many traders will take the route of selling their stocks when the RSI reaches 70 and buy more when it gets to 30, but you should be careful here. Stocks don’t always behave the way we expect them to, so a good look at the general stock volatility and history of the RSI is advisable before making any decisions.

News Reporter
Andrew Cioffi is a marketing specialist and a writer. He lives with his wife and two children on the sunny shores of Australia, but dearly misses his home in the cold German north.