Maximize the use of indicators in day trading

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Maximize the use of indicators in day trading

The efficiency of one’s trades depends on the use of varied technical analysis indicators. And the good news is that broker IQ Option offers its users a variety of tools and indicators to use in trading. As a beginner, the challenge for you is understanding these different indicators and choosing what’s best for your situation.

When faced with options, experienced traders recommend limiting it to two or three. You’ll find so many indicators but you don’t need many, for sure not all of them. In fact, some critical trading information can be gleaned on the price chart. In short, the use of indicators is not mandatory. However, these indicators can represent trading information in a different way and can be used to identify market movements or patterns.

Remember, these are just tools and their usefulness eventually depends on how you use it.

With IQ Option you can use up to 3 indicators at a time.

Some of the best indicators work the same way. Just take the case of RSI, MACD, and Stochastic. Although these are different indicators, they often present similar and overlapping information. Using these three indicators may not be helpful. You can simplify this by just using two moving averages which can substitute for MACD. The problem with overlapping indicators is that they offer similar signals and cannot be used to confirm one another.

Our suggestion is to select an indicator from each category.

Oscillators. In this category, the information from indicators will fluctuate between two lines, with lower and upper boundaries. Some examples of indicators here are the Commodity Channel Index (CCI), RSI, Stochastic, MACD and more.

Overlays. In contrast to the oscillators which are placed below the charts, the overlays are placed directly on the charts. The indicators included in this category are Moving Averages, Parabolic SAR, Bollinger Bands, and Fibonacci Retracements.

Combining Indicators – How to do that?

With IQ Option platform you can combine indicators based on your asset, trading style, and personal preferences. However, you need to follow some rules when combining indicators.

During strong trends, you can trade without the use of indicators.

To recap, it’s highly recommended to choose just one indicator for every category. To check the strength and direction, you can rely on MACD. And to identify the best entry and exit points, then the Bollinger Bands can prove helpful.

An Oscillator can be used together with an Overlay. Just remember that there are certain combinations of indicators that can work efficiently. And it’s possible that you can use at least two overlays at the same time. For example, some traders use Parabolic SAR with a moving average. If this is the case, it’s recommended that you should maintain your trading screen clutter-free. If there’s too much information, you may be distracted in fully appreciating the data. At the end of the day, these are just indicators and cannot deliver sure profits. Your skills and reading the indicators are still critical in transforming data to profits.

Remember, don’t use more than 3 indicators. To maximize the results, make sure you understand how these indicators work and the kind of information that you’ll get. It is only through this process that you can fully use these trading indicators to your advantage.

As we said above. These are just tools and their usefulness eventually depends on how you use it.

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More about the author J. Pro

Unlike Stephen (the other author) I have been thinking mainly about online business lately. I wasn’t very successfull with dropshipping on Amazon and other ways of making money online, and I’d only earn a few hundreds of dollars in years. But then binary options caught my attention with it’s simplicity. Now I’m glad it did because it really is worth it. More posts by this author

Best Indicator for Intraday Trading

Be it a beginner or an established trader, following the basic intraday tips is a common practice before starting the trading day. However, your trading strategy changes with time and the concurrent events play a huge role in its working. In order to maximize returns, it is essential to understand the market. For this purpose, there are trading indicators. Trading indicators are beneficial tools that are used with a comprehensive strategy to maximize returns.

Information Offered by Intraday Trading Indicators

  1. The direction of the trend to determine the movement
  2. The lack of or existing momentum within the investment market
  3. Profit potential due to the volatility
  4. Determine the popularity through volume measurements

These are the vital pointers shared by trading indicators. These basic, but beneficial pointers help in assessing the market conditions and allow traders to make better decisions with respect to trade positions.

Useful Intraday Trading Indicators

Moving Averages:

Traders often hear about daily moving averages (DMA), which is the most common and widely used indicator. The moving average is a line on the stock chart that connects the average closing rates over a specific period. The longer the period, the more reliable the moving average. This indicator will help you comprehend the underlying movement of the price, as prices do not move only in one direction. Stock prices are volatile and the moving average indicator smoothens the volatility to provide an understanding of the underlying trend of the price movement.

Bollinger Bands:

This intraday trading indicator is one step ahead of the moving average. This band comprises three lines—the moving average, an upper limit and a lower one. All these are representative of the stock’s standard deviation, which is nothing but the amount by which the price increases or decreases from its average. This provides traders an understanding of the stock’s trading range.

Momentum Oscillators:

Stock prices move up and down. There are short-period cycles that are unrelated to the bullish or bearish market trends. In such cases, it is easy for day traders to miss out on such changes, which is when the momentum oscillator is beneficial. This indicator is depicted within a range of 0 to 100 and is advantageous when the price has achieved a new high or low, and one wants to determine whether it will further rise or fall. In other words, the momentum oscillator helps to understand when the market sentiments are undergoing modifications.

Relative Strength Index (RSI):

The RSI is one of the useful intraday trading tips to compare the share price’s gains and losses. This information is then formulated in an index form, which further helps in narrowing down the RSI score ranging between 0 and 100. This index increases with price rises and vice versa. Once the RSI increases or decreases to a specified limit, you can modify your trading strategy.

Decoding the Intraday Trading Indicators

Moving Averages:

If short-term averages are exceeding the long-term averages, it indicates a bullish market trend. Traders may take a buy call with specific strategies like stop-loss either at the long-term moving average or retracement support and vice versa. This intraday tip can help traders earn decent profits through intraday trading.

Bollinger Bands:

If the stock is trading at a price below the Bollinger Band lower line, there is potential for the price to increase in the future. Traders can choose to take a buy position. On the other hand, if the current stock price is over the upper line, traders can sell the share.

Momentum Oscillators:

If the share price has reached a historical high, and the level of the oscillator is not the same as the price, it is indicative of slowly decreasing demand. This also indicates the possibility of a stock price fall. And the opposite is true for stock price rise.

Most analysts will recommend traders to sell the stock when the RSI touches 70 and a buy recommendation when it falls to 30. However, all stocks may not adhere to this pattern, so it is important to analyse the volatility and RSI history before making a decision.

Using intraday trading indicators help in averting risk and placing appropriate trades based on technical analysis and market sentiments. Angel Broking offers detailed charts and stock analysis reports that comprise these trading indicators. These tools help in planning an effective trading strategy, while minimizing risks.

Top Technical Indicators for Rookie Traders

Starting out in the trading game? Looking for the best technical indicators to follow the action is important. It affects how you’ll interpret trends—both on positions and in the broad averages—as well as the type of opportunities that pop up in your nightly research. Choose wisely and you’ve built a solid foundation for success in speculation. Choose poorly and predators will be lining up, ready to pick your pocket at every turn.

Most novices follow the herd when building their first trading screens, grabbing a stack of canned indicators and stuffing as many as possible under the price bars of their favorite securities. This “more is better” approach short circuits signal production because it looks at the market from too many angles at once. It’s ironic because indicators work best when they simplify the analysis, cutting through the noise and providing usable output on-trend, momentum, and timing.

Instead, take a different approach and break down the types of information you want to follow during the market day, week, or month. In truth, nearly all technical indicators fit into five categories of research. Each category can be further subdivided into leading or lagging. Leading indicators attempt to predict where the price is headed while lagging indicators offer a historical report of background conditions that resulted in the current price being where it is.

  1. Trend indicators (lagging) analyze whether a market is moving up, down, or sideways over time.
  2. Mean reversion indicators (lagging) measure how far a price swing will stretch before a counter impulse triggers a retracement.
  3. Relative strength indicators (leading) measure oscillations in buying and selling pressure.
  4. Momentum indicators (leading) evaluate the speed of price change over time.
  5. Volume indicators (leading or lagging) tally up trades and quantify whether bulls or bear are in control.

So, how can a beginner choose the right setting at the start and avoid months of ineffective signal production? The best approach in most cases is to begin with the most popular numbers while adjusting one indicator at a time and seeing if the output helps or hurts your performance. Using this method, you’ll quickly grasp the specific needs of your level.

Now that you understand the five ways that indicators dissect market action, let’s identify the best ones in each category for novice traders.

Key Takeaways

  • Technical indicators, by and large, fit into five categories – trend, mean reversion, relative strength, volume, and momentum.
  • Leading indicators attempt to predict where the price is headed while lagging indicators offer a historical report of background conditions that resulted in the current price being where it is.
  • Popular technical indicators include SMAs, EMAs, bollinger bands, stochastics, MACD, and on-balance volume.

Trend: 50 and 200-day EMA

We’ll start with two indicators that are embedded within the same panel as the daily, weekly, or intraday price bars. Moving averages look back at price action over specific time periods, subdividing the total to create a running average that’s updated with each new bar. The 50- and 200-day exponential moving averages (EMAs) are more responsive versions of their better-known cousins, simple moving averages (SMAs). In a nutshell, the 50-day EMA is used to measure the average intermediate price of a security, while the 200-day EMA measures the average long term price.

US Oil Fund (USO)’s 50- and 200-day EMAs rose steadily into the summer of 2020, while the instrument pushed up to a 9-month high. The 50-day EMA turned lower in August, with the 200-day EMA following suit one month later. The shorter-term average then crossed over the longer-term average (indicated by the red circle), signifying a bearish change in trend that preceded a historic breakdown.

Mean Reversion: Bollinger Bands (20,2)

USO buying and selling impulses stretch into seemingly hidden levels that force counter waves or retracements to set into motion. Bollinger bands (20,2) try to identify these turning points by measuring how far price can travel from a central tendency pivot, the 20-day SMA in this case, before triggering a reversionary impulse move back to the mean. The bands also contract and expand in reaction to volatility fluctuations, showing observant traders when this hidden force is no longer an obstacle to rapid price movement.

Relative Strength: Stochastics (14,7,3)

Market movement evolves through buy-and-sell cycles that can be identified through stochastics (14,7,3) and other relative strength indicators. These cycles often reach a peak at overbought or oversold levels and then shift in the opposite direction, with the two indicator lines crossing over. Cycle alternations don’t automatically translate into higher or lower security prices as you might expect. Rather, bullish or bearish turns signify periods in which buyers or sellers are in control of the ticker tape. It still takes volume, momentum, and other market forces to generate price change.

SPDR S&P Trust (SPY) oscillates through a series of buy-and-sell cycles over a 5-month period. Look for signals where:

  1. a crossover has occurred at or near an overbought or oversold level
  2. indicator lines then thrust toward the center of the panel.

This two-tiered confirmation is necessary because stochastics can oscillate near extreme levels for long periods in strongly trending markets. And, while 14,7,3 is a perfect setting for novice traders, consider experimenting to find the setting that best fits the instrument you are analyzing. For example, experienced traders switch to faster 5,3,3 inputs.

Momentum: MACD (12.26.9)

Moving average convergence divergence (MACD) indicator, set at 12,26,9, gives novice traders a powerful tool to examine rapid price change. This classic momentum tool measures how fast a particular market is moving, while it attempts to pinpoint natural turning points. Buy or sell signals go off when the histogram reaches a peak and reverses course to pierce through the zero line. The height or depth of the histogram, as well as the speed of change, all interact to generate a variety of useful market data.

SPY shows four notable MACD signals over a 5-month period. The first signal flags waning momentum, while the second captures a directional thrust that unfolds right after the signal goes off. The third signal looks like a false reading but accurately predicts the end of the February–March buying impulse. The fourth triggers a whipsaw that’s evident when the histogram fails to penetrate the zero line.

Volume: On-Balance-Volume (OBV)

Keep volume histograms under your price bars to examine current levels of interest in a particular security or market. The slope of participation over time reveals new trends, often before price patterns complete breakouts or breakdowns. You can also place a 50-day average of volume across the indicator to see how the current session compares with historic activity.

Now add on-balance volume (OBV), an accumulation-distribution indicator, to complete your snapshot of transaction flow. The indicator adds up buying and selling activity, establishing whether bulls or bears are winning the battle for higher or lower prices. You can draw trendlines on OBV, as well as track the sequence of highs and lows. It works extremely well as a convergence-divergence tool, as Bank of America (BAC) proves between January and April when prices hit a higher high while OBV hit a lower high, signaling a bearish divergence preceding a steep decline.

The Bottom Line

Choosing the right technical indicators is daunting but can be managed if novice traders focus the effects into five categories of market research: trend, mean reversion, relative strength, momentum, and volume. Once they’ve added effective indicators for each category, they can begin the long but satisfying process of tweaking inputs to match their trading styles and risk tolerance.

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