In this article we will go through the most popular indicators and give a brief overview over what each of them can be used for.
This article is a good starting point for the new daytrader who wants to learn more about technical analysis, and it can also be used as an encyclopaedia.
We will go through every indicators effect, relevance and purpose.
The MACD indicator
The MACD indicator is a very well-known indicator. MACD stands for Moving Average Convergence Divergence. It consist of two moving averages – a slow one and a fast one.
Basically, there are three ways to use the MACD indicator.
Firstly, you can use it as a filter for your trades. So if the indicator crosses above 0, then you can only enter long positions. The reverse is true for short positions.
Secondly, you can use it as a trend-following method where you buy and sell based on when the MACD indicates a continuation of the trend.
Thirdly, you can use it for trade reversals where you use the divergence between the MACD indicator and the price on the chart to forecast a reversal in the trend.
Here you can read a longer article about the MACD indicator which gives a more in-depth explanation about the use of it.
Bollinger Bands is also one the very popular indicators. It is used by a lot of daytraders.
Bollinger Bands can be used for different things. It can:
- Assess the strength in a trend, and
- Give an indication about when the market is balanced and imbalanced.
Generally, there are two trading strategies connected to Bollinger Bands.
The first one is a trend-following strategy where you try to surf the strong trends in the market.
The second one is a method where you go against the trend in anticipation that the price will revert back to the mean.
You can read more about the Bollinger Bands here.
The moving averages er some the simples technical indicators, but at the same time can be some of the most valuable in daytrading. They are often the basis of ther indicators, such as the MACD indicator.
The moving averages are typically used as a filter for assessing whether a given instrument is in an uptrend or downtrend. You can also use two moving averages – a slow one (for example the 200-period) and a fast one (for example the 50-period) – and use them as a more sophisticated filter. When the two of them crosses each other in an upward direction then it is a signal to look to buy, and the reverse is true for when the cross each other in a downward direction.
Furthermore, the moving averages can also act as potential dynamic support and resistance for the price.
You can read more about moving averages here.
The RSI indicator
RSI stands for Relative Strength Index.
It is a very popular indicator which indicates when a given instrument is either overbought or oversold. Typically, the RSI indicator is used in conjunction with a trend-reversal strategy.
With a trend-reversal you can – like the MACD indicator – trade on divergence between the RSI indicator and the the price in anticipation that the trend is about to change.
You can read more about the RSI indicator here and in this and this article about an advance use of the RSI indicator.
Volume is itself not an indicator, but we have chosen to include it in this article because you can easily interpret things from volume in daytrading. Volume is pretty simple, it is the turnover – the total amount of buying and selling of a given instrument on a given time. Typically, the volume is shown vertically in the bottom of the chart.
You can interpret certain things from the volume.
For example, if there is an increase in the volume at the bottom of a trading range it can indicate that there are buyers accumulating and you can get in early in the start of an uptrend.
Volume can also tell us how serious we should take the other signals in our daytrading. If we for an example have a buy signal but very low volume it can be a sign that the setup is going to fail.
You can read more about the use of volume in daytrading here and in this article.
The ADX indicator
ADX stands for Average Directional Index
This indicator tells us whether a given instrument is in a trend or is transmitting from a consolidation phase to a trend phase. The indicator can help us daytraders to not trade in a market that moves sideways, but to wait until it starts trending.
You can read more about the ADX indicator here where there is also a video attached which explains more about the ADX indicator.
The Stochastics indicator
The Stochastics indicator is a common tool in many daytraders’ toolbox.
Stochastics is a so-called oscillator that constantly alternates between to extremes (in this case it’s 0 and 100). This indicator can identify when an instrument is close to being oversold or overbought and thereby indicate a soon to come reversal of the trend.
You can read more about The Stochastics indicator here and read a guide on how to daytrade with the indicator in this article.
The Parabolic SAR indicator
Parabolic SAR is almost a trading strategy in and of itself. SAR stands for Stop and Reverse.
The indicator can tell us something about whether an instrument is in an uptrend or downtrend.
You can take advantage of the indicator by using it to trail your stop-loss. It also performs well in conjunction with some of the other indicators that we have discussed above, for example the moving averages as an extra filter.
You can read more about the Parabolic SAR indicator here, and learn how to daytrade with it.
The CCI indicator
CCI stands for Commodity Channel Index.
This indicator measures the current price level in relation to an average of the price on an instrument.
In other words, the CCI indicator measures the distance between the price in relation to a moving average. That means, that the CCI indicator has a high value when the price a far above the moving average. Conversely, the CCI indicator will have a low value when the price is far below the moving average. Therefore, the CCI indicator can be used to measure overbought and oversold levels. CCI is therefore a good indicator to find trend reversals with.
You can read more about the CCI indicator here.
The Daily ATR indicator
The Daily ATR indicator can give us an indication on whether a given instrument is out of balance.
This is an indicator that can only be used for daytrading, but it is a really important indicator and it’s actually my favourite.
The Daily ATR can be used for mean reversion trading, that means an anticipation that the trend will revers back to its mean.
You can read more about the indicator and how I use it in my daytrading in this article and video.