Day Trading Indicators

Best Day Trading Indicators

13 min read

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.

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 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 buy and sell stocks within seconds or longer. Depending on your strategy, you’re a part 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.

Day Trading Indicators and Reversals

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. It would be best if you also had 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.

Best Technical Indicators for Day Trading

Candlestick Patterns

There are a ton of indicators that a trader can choose from. So much so 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. The next thing you know, you’ve missed out on a great trade. Or you have so many indicators you spend too much time analyzing. The next thing you know is that you’ve overanalyzed and missed the move. It’s good that we’re here to narrow down the best day trading indicators for you, right?

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 always break down, so it isn’t a crystal ball.

When day trading indicators and 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 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. As a trader, you take the time to learn, study, and practice.

Most Accurate Day Trading Indicators

  1. Moving averages
  2. RSI
  3. MACD
  4. Bollinger Bands
  5. On Balance Volume
  6. Stochastics

Fundamental vs Technical Traders

Before we get started and into the details, let’s take a step back to differentiate between fundamental and technical traders.

And yes, there is a difference. You most likely have heard people referring to trading on the fundamentals or the technicals. To make a long story short, here’s what’s relevant to each type of trader.

COMPANY
Trade Ideas Logo TrendSpider Premium Partner Benzinga
DESCRIPTION Trade Ideas provides powerful tools like real-time market scanning, AI-driven trade signals, customizable alerts, advanced charting capabilities, and time-saving data visualization TrendSpider is the most robust all-in-one trading platform on the market today. Uncover strategies, pinpoint opportunities, analyze assets, and time trades like never before Benzinga allows traders to profit with actionable stock news, trading signals and alerts, A streaming platform with all the information you need to invest smarter today
HIGHLIGHTS

What 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. 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 an investment advisor who does this for you. Either way, nine times out of ten, you or your licensed planner looks at the above criteria before going in for the long haul. If you’re looking at fundamentals independently, we recommend Stock Rover

What 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 the 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, they aim 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 common, dare I say, best technical indicators for day trading.

Day Trading Indicators

How Many Day Trading 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 have 7; the 9 and 20 EMAs, 50 and 200 SMAs, VWAP, volume and RSI.

I will start with one of the most essential indicators there: volume. Any day trader knows that volume or the number of shares traded over a given period is a must.

And the higher the volume, the more active the security. As you’ll see below, there are 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.). This means that 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 a relatively high volume is seen as stronger and more relevant than a similar move with a 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 is possible; firstly, this could be a great short opportunity or secondly, a potential to dip buy once it has found its bottom. If the volume starts 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, you must 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. Please be careful, though. If there’s a decrease in volume, it signals an end of the trend and a lack of interest.

It’s a warning of a potential reversal. I advise you to leave 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 with an average of 300,000 shares traded daily. Why? It means many people are 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. Remember, 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.

COURSE
Day Trading Course Options Trading Course Futures Trading Course
DESCRIPTION Learn how to read penny stock charts, premarket preparation, target buy and sell zones, scan for stocks to trade, and get ready for live day trading action
Learn how to buy and sell options, assignment options, implement vertical spreads, and the most popular strategies, and prepare for live options trading How to read futures charts, margin requirements, learn the COT report, indicators, and the most popular trading strategies, and prepare for live futures trading
INCLUDED

What Technical Indicators Do Professional Day Traders Use?

We want to trade like the professionals. 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. 

1. 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 sellers control 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.

Many 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 the price trades inside or outside the bands, I know consolidation is coming. And I wait. 

2. RSI

The RSI oscillator, known as the Relative Strength Index, is one of the momentum indicators. 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 powerful indicator that 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 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 do we capitalize on this? It could be a great time for a short entry. Alternatively, it’s time to exit your position if you’re long in the stock.

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 upward direction.

How do we capitalize on this? Consider a dip buy.

3. 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 trader’s discretion, 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

4. Float

Another vital component 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 stocks will 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.

5. 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.

Final Thoughts: Day Trading Indicators

Momentum indicators are powerful tools for traders 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
Candlestick patterns are the most accurate and reliable trading indicator. Most trading indicators like moving average lines, rsi, and macd are lagging indicators, while price action is a real-time indicator.

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