INDICATOR

 

7 Technical Indicators to Build a Trading Toolkit

Technical indicators are used by traders to gain insight into the supply and demand of securities and market psychology. Together, these indicators form the basis of technical analysis. Metrics, such as trading volume, provide clues as to whether a price move will continue. In this way, indicators can be used to generate buy and sell signals.

Seven of the best indicators for day trading are:

• On-balance volume (OBV)
• Accumulation/distribution line
• Average directional index
• Aroon oscillator
• Moving average convergence divergence (MACD)
• Relative strength index (RSI)
• Stochastic oscillator

You don't need to use all of them, rather pick a few that you find helpful in making better trading decisions. Learn more about how these indicators work and how they can help you day trade successfully.

Tools of the Trade

The tools of the trade for day traders and technical analysts consist of charting tools that generate signals to buy or sell, or which indicate trends or patterns in the market. Broadly speaking, there are two basic types of technical indicators:

1. 1 Overlays: Technical indicators that use the same scale as prices are plotted over the top of the prices on a stock chart. Examples include moving averages and Bollinger bonds .
2. 2 Oscillators: Rather than being overlaid on a price chart, technical indicators that oscillate between a local minimum and maximum are plotted above or below a price chart. Examples include the stochastic oscillator, MACD, or RSI. It will mainly be these second kind of technical indicators that we consider in this article.

3. Average Directional Index

The Average Directional Index (ADX) is a trend indicator used to measure the strength and momentum of a trend. When the ADX is above 40, the trend is considered to have a lot of directional strength, either up or down, depending on the direction the price is moving.

When the ADX indicator is below 20, the trend is considered to be weak or non-trending.

4. Aroon Indicator

The Aroon oscillator is a technical indicator used to measure whether a security is in a trend, and more specifically if the price is hitting new highs or lows over the calculation period (typically 25).

The indicator can also be used to identify when a new trend is set to begin. The Aroon indicator comprises two lines: an Aroon Up line and an Aroon Down line.

When the Aroon Up crosses above the Aroon Down, that is the first sign of a possible trend change. If the Aroon Up hits 100 and stays relatively close to that level while the Aroon Down stays near zero, that is positive confirmation of an uptrend.

The reverse is also true. If Aroon Down crosses above Aroon Up and stays near 100, this indicates that the downtrend is in force.

Image by Sabrina Jiang © Investopedia 2020

5. MACD

 (MACD) indicator helps traders see the trend direction, as well as the momentum of that trend. It also provides a number of trade signals.

When the MACD is above zero, the price is in an upward phase. If the MACD is below zero, it has entered a bearish period.

The indicator is composed of two lines: the MACD line and a signal line, which moves slower. When MACD crosses below the signal line, it indicates that the price is falling. When the MACD line crosses above the signal line, the price is rising.