The share market is the place where thousands of transactions and trades take place within a second. The market is highly volatile and no one can 100% predict what will be the next move of the market. Current affairs, national and international events also heavily impact the market state. Therefore, stock market traders continuously keep analyzing different charts, patterns, and indicators and make trading decisions based on that. Share market indicators play a crucial role in market analysis. Whether the trader is new or experienced they must use indicators as it is the main tool for them in market analysis. In this blog, we have discussed seven technical indicators which are the best indicators for day trading. It is not necessary to use all of them, rather pick a few that will be suitable for making better trading decisions. We have discussed each intraday indicator in detail and also mentioned the use of each indicator. This blog is going to help you to decide which indicators to use and which not. So, read on.
What is a Share market indicator?
A calculation tool that is used by traders to analyze financial data to predict stock market movements is called the share market indicator. There are thousands of technical indicators available there and the share market indicators are a subset of these indicators.
Importance of Intraday Indicators
Intraday indicators overlay on charts that provide significant information through mathematical calculations. As the name suggests, the share market indicators indicate the future movement of price and thereby help traders to predict future moves and strategies. Keeping track of intraday indicators is a must for intraday traders.
Intraday indicators show useful information about market trends and help traders maximize their returns. Indicators help predict the supply and demand of securities and market psychology. Share market indicators form the basis of technical analysis. Metrics provide clues as to whether a price move will continue or not. This way buy and sell signals are generated by the indicators which help traders in their trading.
Classification of Intraday Indicators
This indicator indicates the current trend of the market or the direction in which the market is moving. The trend indicators are nothing but oscillators that moves between high and low values.
Momentum indicators indicate how strong the trend is and also show whether there is a likelihood of trend reversal or not. One such indicator is the Relative Strength Index (RSI), which is used for indicating the top and bottom of the price.
Volume indicators indicate how the volume changes with time. Volume indicators give data about the number of stocks that are being bought and sold over time. Volume indicates how strong the move is upon price change. On-Balance Volume is one of the volume indicators.
Volatility indicates the price change in the given period. High volatility indicates large price moves whereas, lower volatility indicates smaller price moves over a period of time.
Tools of the Trade
Charting tools are the tools of the trade that generate signals to buy or sell. Market trends and patterns are indicated by these tools. Generally, there are two basic types of technical indicators:
These Technical indicators plots the prices over the top of the prices on a stock chart. Moving averages and Bollinger Bands or Fibonacci lines are examples of Overlays.
These technical indicators oscillate/move between a local minimum and maximum and are plotted above or below a price chart, rather than being overlayed on a price chart. The Stochastic Oscillator, MACD, or RSI are examples of Oscillators.
Best Intraday Indicators
Many times, traders use several different technical indicators in pairs when analyzing security. There are thousands of indicators available but traders must choose the indicators that work best for them and should know how these indicators work. To make good and strategic decisions traders often combine technical indicators with more subjective forms of technical analysis, such as analyzing charts, patterns, etc. Upon giving quantitative nature, technical indicators can also be incorporated into automated trading systems. Let's see these indicators one by one.
An On-Balance-Volume indicator (OBV) is used to measure the positive and negative flow of volume in a security over time. This indicator indicates the running total of up volume minus down volume.
Up volume is the volume on a day when the price increases and down volume is the volume on a day when the price falls. Based on the higher and lower price moves, each day volume is added or subtracted from the indicator.
The rising on-balance volume (OBV) shows that buyers are willing to step in and push the price higher. The falling OBV indicates the rising selling volume which indicates lower prices. In this way, OBV acts like a trend confirmation tool. The rising OBV and the rising price indicate a continuation of the trend.
When the indicator and price are going in different directions, the traders using OBV also watches for a divergence. Rising prices and falling OBV could indicate that the trend is not backed by strong buyers and could soon reverse.
Accumulation/Distribution Line (A/D Line)
This is one of the most commonly used indicators to determine the money in and outflow of security. Instead of considering only the closing price of the security for the period like on-balance volume indicator (OBV), Accumulation/Distribution Line also takes into account the trading range for the period and where the close is, concerning that range. If a stock closes near its high, the indicator gives more weight to the volume than if it closes near the midpoint of its range.
Though OBV and A/D are some of the best indicators, it is not necessary that both the indicators will work better in every situation. Rather, one performs better in one situation and one might be better for the other.
If the A/D indicator line is trending up, it shows buying interest, as the stock is closing above the halfway point of the range. This helps confirm an uptrend. On the other hand, falling the A/D line indicates the price is finishing in the lower portion of its daily range, and thus volume is considered negative. This helps confirm a downtrend.
Traders also keep watch on the divergence while using the A/D line. The falling A/D line and rising price signal that the trend is in trouble and could reverse. In the same way, lower prices and rising A/D indicate the higher prices to come.
Average Directional Index
This is the trend indicator and is used to measure the strength and momentum of a trend. The ADX indicator above 40 indicates that the trend is having a lot of directional strength, either up or down, depending on the direction of the price move. When the ADX indicator is below 20, then the trend is considered to be weak or non-trending. On the indicator, ADX is the mainline which is generally colored black. There are two additional lines that can be optionally shown that are DI+ and DI-. All three lines work together to show the direction of the trend as well as the momentum of the trend.
ADX above 20 and DI+ above DI-: Indicates uptrend.
ADX above 20 and DI- above DI+: Indicates downtrend.
ADX below 20 and DI- and DI+ rapidly crisscrossing ADX: Indicates Weak trend.
If the price is hitting new highs or lows over the calculation period (generally 25), Aroon Indicator measures whether a security is in a trend or not. This indicator identifies when a new trend is set to begin. The Aroon indicator consists of two lines:
An Aroon-up line
An Aroon-down line
When the Aroon-up goes above and crosses the Aroon-down line, this is the first sign of a possible trend change. When the Aroon-up line hits 100 and stays nearly to that level and the Aroon-down line stays near zero, then it is the positive confirmation of an uptrend and vise versa. If the Aroon-down line crosses and goes above Aroon-up and stays near 100, this indicates the downtrend is in force.
Moving Average Convergence Divergence Indicator (MACD)
This indicator helps traders see the trend direction, as well as the momentum of that trend. The number of trade signals is also provided by this indicator.
When MACD is above zero, price is in an upward phase.
When MACD is below zero, price shows a bearish period.
This indicator comprises two lines that are the MACD line and a signal line.
When MACD goes below the signal line indicates the falling price.
When MACD line foes above the signal line indicate the rising price
Depending upon the position of this line whether it is above or belove zero this indicator helps in determining which signals to follow.
Relative Strength Index (RSI)
This intraday indicator moves between zero and 100 and plots recent price gains against recent price losses. The RSI levels, therefore, help in calculating momentum and trend strength. This indicator is mainly used to indicate three things,
Overbuying and overselling
It is the basic function of the RSI indicator. When RSI moves above 70, the asset is considered overbought and could decline. When the RSI is below 30, the asset is oversold and could increase. For the safer side traders don’t rely only on these movements of RSI. Before selling, traders wait for the indicator to rise above 70 and then drop below. Before buying, they wait for the indicator to drop below 30 and then rise back above before buying.
This is another use of the RSI. The indicator moving in a different direction than price shows that the current price trend is weakening and could soon reverse.
Support and resistance levels
During uptrends, a stock often stays above level 30 and frequently reaches 70 or above. During a downtrend, the RSI will typically hold below 70 and frequently reach 30 or below.
This intraday indicator measures the current price relative to the price range over some period. This is Plotted between zero and 100. During an uptrend, the price should be making new highs. In a downtrend, the price generally makes new lows. The stochastic oscillator tracks whether this is happening or not.
Stochastic is often used as an overbought and oversold indicator because it moves up and down relatively quickly. This is possible because it is rare for the price to make continual highs, keeping stochastic near 100, or continual lows by keeping stochastic near zero.
Oscillator levels above 80 are considered overbought, when the indicator moves above 80 and then drops back below then this is a possible signal to short a trade.
Oscillator levels below 20 are considered oversold, when the indicator drops below 20 and rises back above it, that is a possible buy signal.
Knowing the direction of a given asset's momentum and attempting to profit from it, is probably the goal of every trader. There are several technical indicators and oscillators developed for this specific purpose. We have seen some of the best indicators for intraday trading. Make use of these indicators to develop new strategies or consider incorporating them into your current strategies. Practice using these indicators in a demo account and determine which ones to use. Pick the one which best suits you and ignore the other ones or you can use these indicators in tandem. Technical indicators are a crucial part of the analysis that takes place in day trading. A combination of trend following, momentum, volume, and volatility indicators allows day traders to gain an edge in profiting from short-term price changes and helps traders analyze and predict the possible move of the market.