Day trading indicators are important tools every trader needs to help them make a trading decision. When you’re day trading, you have to be able to make split-second decisions. Those decisions can be the difference between profit and loss. While indicators are lagging and not foolproof, they can be of help.
Table of Contents
What Are the Best Indicators for Day Trading?
- Candlesticks: the best day trading indicator
- Stock volume: important for liquidity
- Moving average lines: good for support and resistance levels
- VWAP: important intraday indicator
- Level 2: shows the different bid/ask levels
- Time and sales: shows the order flow
- RSI: shows overbought and oversold levels
- Bollinger bands: visual overbought and oversold levels
- Previous close: popular for red to green moves
Technical indicators can help slow down the noise of price movement. However, too many day trading technical indicators can make your charts messy and hard to read.
It’s all about finding a few that work without loading down your charts. Charts are the bread and butter of trading.
The stock market is a tug of war between buyers and sellers. As a day trader, you’re buying and selling stocks within seconds or longer. Depending on your strategy, you’re apart of that fight as a buyer or seller.
Day trading indicators aren’t bad or good. You’ll hear people swear by them and people who hate them. They are there as a tool and nothing more.
One thing indicators are good for is signaling reversals or giving help with buy and sell signals. Technical indicators are used to predict future trends. It’s important to remember that they’re not a crystal ball.
Above all, they’re tools. When used properly, they give confirmation as well as a guide. Of course you can’t have indicators by themselves. You also need candlesticks.
Candlesticks are the foundation of technical trading. It’s when candlesticks are coupled with technical indicators that the bigger picture is painted. It’s important to know what bullish candlesticks, bearish candlesticks and doji candlesticks mean and look like.
What Are the Best Technical Indicators for Day Trading?
There are a ton of indicators that a trader can choose from. So much so, in fact, that you can go a little crazy and bog down your charts. If you put them all on there, you can’t see any moves. Next thing you know, you’ve missed out on a great trade. Or you have so many indicators, you spend too much time analyzing. Next thing you know, you’ve overanalyzed and missed the move. Good thing we’re here to narrow down the best day trading indicators for you right?
Patterns
Patterns are a huge part of stock trading. When patterns are coupled with day trading indicators it gives traders a clear picture of an upcoming move. Patterns do break down all the time so, of course, it isn’t a crystal ball.
When day trading indicators are bullish and the patterns are bullish, you have the confidence to go long in a trade. The opposite is also true. If you see tweezer top patterns and the indicators are going bearish, you know to get out of a trade or take the short side.
Patterns and indicators when used properly give you a great chance to be a successful trader.
Day trading indicators are tools to be used for confirmation. Some traders like them and some don’t. There’s no right or wrong on what indicators you do or don’t like. Technical indicators don’t produce profits. It’s you as a trader, taking the time to learn, study and practice.
Fundamental Traders vs Technical Traders
Before we get started and into the nitty-gritty details, let’s take a step back to differentiate between those who are fundamental traders vs those who are technical traders.
And yes, there is a difference. You most likely have heard people referring to trading on the fundamentals or trading on the technicals. To make a long story short, here’s what’s relevant to each type of trader.
What Do Fundamental Traders Look At?
- Earnings Announcements
- Company Cash Flow Statements
- Long-term stock charts
- Analysts Upgrades/Downgrades
- Stock Splits
In essence, fundamental traders are the “buy and hold” type of trader. You may be a fundamental trader and don’t even know it. If you hold long-term investments, that’s you.
Maybe you have a financial planner and/or an investment advisor who does this for you. Either way, nine times out of ten, you or your licensed planner looks at the criteria listed above before going in for the long haul. If you’re looking at fundamentals on your own, we recommend Stock Rover.
What Do Technical Traders Look At?
- Volume
- Trend
- Momentum
- Volatility
Technical traders focus on charts and graphs in an “attempt” to determine the direction of a stock or the beginning, continuation or end of a trend.
Notice how I emphasize attempt. And to nail down a bit deeper, momentum day traders look for stocks that are moving significantly in one direction on high volume.
Ultimately their goal is to ride the momentum train until they hit their profit level. So what are the best technical indicators for day trading?
Let’s explore some of the common, dare I say best technical indicators for day trading.
How Many Technical Indicators Should I Use?
Before we get into the best technical indicators for day trading, we need to know how many to look at. It can depend on who you ask in all reality. Some people think technical indicators are completely unnecessary. Others will tell you, you need at least 5. I personally have 7; the 9 and 20 EMAs, 50 and 200 SMAs, VWAP, volume and RSI.
I’m going to start with, one of the most essential indicators there is: volume. Any day trader knows that volume or the number of shares traded over a given period or time is a must.
And the higher the volume, the more active the security. As you’ll see below, there’s a few reasons why volume is so important. So what does volume mean in stocks?
Volume Verifies Trends
Volume is used to confirm uptrends such as breakouts, downtrends and overall chart patterns (i.e. head and shoulders, flags, etc.). Which means, if you want to trade breakouts, a volume surge is mandatory to confirm that it’s in fact, a breakout.
Any price movement (up or down) with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume. Commonly, we see surges of volume in the pre-market and novice traders get burned because they buy right out of the gate. Be careful because the stock could crash or pull back upon market opening because it is either overbought/super-extended.
You see the crash because usually everyone jumps out at the market opening, which causes a wash. Let’s say you see this setup; what should you do?
One of two things are possible; firstly, this could be a great short opportunity or secondly, a potential to dip buy once it found its bottom. If the volume is starting to decrease in an upward trend, it’s usually a sign that the upward run is about to end. In other words, a reversal is coming. That, in my opinion, is pretty powerful information to know.
Volume Precedes Price
A surge of volume is mandatory to confirm a breakout. If there’s no volume it is not a breakout; it could be just a false rally. Thus, if you’re looking at a significant price movement, it’s critical you also example the volume to see whether it tells the same story.
An example would be a stock surging in price; you jump in and buy. Be wary though. If there’s a decrease in volume, it signals an end of the trend and a lack of interest.
It’s warning of a potential reversal. My advice to you is to get out now if you’re long in the stock. On the other hand, if you fancy the short side of things, this is your time to enter.
My Volume Criteria
As a rule, I want to identify a stock that has an average of 300,000 shares traded per day. Why? It means there’s a lot of people willing to buy what I’m selling or vice versa.
I want to be able to enter and exit a trade quickly. In other words, I don’t want to be stuck with a stock I can’t unload. Now keep in mind this is my preference, and sometimes I adjust it to 500,000.
You might like to keep the numbers higher at a million or lower at 100,000; it’s your choice.
What Technical Indicators Do Professional Traders Use?
We want to trade like the professionals right? So what are the best technical indicators for day trading? The pros use moving averages, Bollinger bands, On Balance Volume or OBV to name a few.
Best Technical Indicators For Day Trading - VWAP
Next to volume, VWAP or the Volume Weighted Average Price is probably one of the most important day trading technical indicators. I know of some traders who only use VWAP and Volume to confirm their entry and exit points.
Other moving averages are calculated based only on the price of the stock on the chart; whereas VWAP takes into account both price and volume. Thus it lets you know if the buyers or the sellers are in control of the price action.
So, if I want to go long on a stock, I ensure the candlesticks are above VWAP. The opposite is true if I want to short; the candlesticks must be below VWAP.
A lot of traders will take a small position entry on the VWAP in anticipation of a bounce. Some platforms such as Trade Ideas even have built-in VWAP crossover scanners; this goes to show the weight this indicator throws around.
If you want to know how to predict when a stock will go up, then a trend indicator like VWAP is extremely helpful. I use the upper and lower VWAP bands instead of Bollinger bands.
That way, when price is trading inside or outside of the bands, I know consolidation is coming. And I wait.
Best Technical Indicators For Day Trading - RSI
The RSI oscillator is known as the Relative Strength Index, and is one of the momentum indicators. By definition, RSI is the average gain of up periods during a specified time frame divided by the average loss of down periods.
Yes I know, that’s a mouthful. Usually, it’s over 14 trading days, and the resulting number will tell us if a reversal is imminent. It’s a pretty powerful indicator and one the savvy day trader should heed.
RSI measures on a percentage scale from 0 to 100 and is most advantageous when you can’t see a clear trend. In most instances, this would be a stock that is trading horizontally or sideways.
RSI > 70% = Overbought
What does this mean? The stock is overbought and is trading near the top of its high-low range. Thus it is primed for a reversal in the down direction
How to capitalize on this? It could be a great time for a short entry. Alternatively, if you’re long in the stock, it’s time to exit your position.
RSI< 30% = Oversold
What does this mean? The stock is oversold and is trading near the bottom of its high-low range. Thus it is primed for a reversal in the up direction.
How to capitalize on this? Consider a dip buy.
Best Technical Indicators For Day Trading - MACD
Another popular momentum indicator is the moving average convergence divergence (MACD) oscillator. MACD shows the relationship between two moving averages.
Even though it is up to the discretion of the trader, you typically use the 12-day and 26-day exponential moving averages (EMAs). Subtracting these EMAs from each other gives us the MACD line which is then (usually) graphed with a 9-day EMA.
Next, the 9-day EMA or signal line is plotted on top of the MACD, functioning as a buy and sell trigger.
12 day EMA>26 day EMA = +MACD = upside momentum is increasing
12 day EMA<26 day EMA = -MACD = downside momentum is increasing
Which Technical Indicator Is the Most Accurate?
- Moving averages
- RSI
- MACD
- Bollinger Bands
- On Balance Volume
- Stochastics
Float
Another vital component necessary to your success as a day trader is float, or the number of shares available to trade on the open market.
Generally speaking, the lower, the better because these are the stocks that will move and move quickly because they’re less liquid.
In other words, a huge demand can very quickly move the price of a stock, and you want to capitalize on this.
My recommendation is to set two filters. Your first filter should be for a float greater than 300,000 to ensure the stock is, in fact, liquid.
Likewise, your second filter should be for a float with less than 20 million shares traded. Stocks with floats over 20 million don’t have the big daily price moves you want for day trading.
Relative Volume (RVOL)
RVOL, displayed as a ratio, compares the current volume to the normal volume for the same time of day. For example, if a stock is trading five times its normal volume, it would have a relative volume display of five.
In the day trading world, we like to see RVOL at two or higher with a positive catalyst (i.e. positive news on a drug trial).
A high RVOL coupled with a low float is a stock with the potential to make you money! Almost every winner has a high relative volume that day compared to its average volume.
Day Trading Indicators Final Thoughts
Momentum indicators are crucial tools for traders and powerful ones when combined with other technical indicators. Once a direction’s been established, momentum indicators are valuable because they tell us the strength of price movement trends and when the end is near.
If you need more help, take our day trading course.
Frequently Asked Questions
- 1 Minute: best for entries and quick scalps
- 5 Minute: good for slower intraday setups
- 1 Hr: good for longer intraday setups
- Daily: key for breakouts
