Day trading is a tempting prospect. After all, who wouldn’t love to work full-time as a day trader and make good money? But if it were easy, then everyone would do it, right?
Fortunately, technical analysis is a tried-and-true toolkit that day traders can pull from to optimize their trading success. But what exactly are the best indicators for day trading?
To answer this question and help you trade smarter, this article will provide a brief overview of technical indicators and then cover six of the best indicators for day trading.
Technical Indicators 101
Day-trading analysis generally aims to identify the direction that a given security will move, the degree and durability of its momentum, and how profit can be made from this movement.
While this has led to the creation of hundreds or even thousands of technical indicators, this article will cover a few of the most popular ones. These are proven trading tools that belong in any day trader’s toolkit. Once you get them down, you can always explore other options.
First, though, let’s briefly cover the two main types of technical indicators:
- Oscillators – There are many kinds of oscillators, but they each oscillate (hence the name) between local minimums and maximums that are plotted above or below the price chart. Frequently used oscillators include MACD and RSI.
- Overlays – Rather than plotted below or above a price chart, overlays match the same scale as prices and are plotted (or laid) over them (hence the name). Popular examples include Fibonacci lines or Bollinger Bands and moving averages.
It’s quite typical to use and compare several different indicators when studying a given security. Traders should aim to understand a variety of indicators and learn which ones produce the best results for them.
While technical analysis is indeed “technical,” traders might complement it with more subjective analysis, such as studying chart patterns and financials. In this way, there are many tools that make up a trader’s technical analysis toolkit, and that toolkit may itself be one part of a broader trading strategy.
Now, let’s look at some of the most trusted technical indicators used by successful day traders.
6 popular technical indicators for day trading
Moving average convergence divergence (MACD)
Commonly abbreviated as MACD, the moving average convergence divergence indicator signals the direction and momentum of a trend. It also helpfully provides various trade signals.
There are many uses of MACD, but traders typically use it to identify either a bullish trend (MACD above zero) or bearish trend (MACD below zero).
The MACD technical indicator actually produces two lines, as there is a signal line in addition to the MACD line. The signal line lags the MACD line; when MACD crosses below the signal line, it indicates a falling price, and when it crosses above, it signals a rising price.
A quick glance at where the indicator falls on the chart (above or below zero) helps determine which signals to consider. When it’s above zero, a buy signal would come once the MACD crosses above the signal line. And when MACD is below zero, a sell (or possible short trade) would come once the MACD crosses below the signal line.
Day traders like to use the stochastic oscillator as it shows current price relative to price range over various periods of time. Plotted on a scale of 0 to 100, the stochastic oscillator indicates that, when uptrending, the asset’s price should keep making new highs. On the other hand, downtrends in the oscillator would suggest the price making new lows.
Since the stochastic oscillator measures new highs (near 100) or new lows (near 0), and it is rare for securities to continually hit new highs or lows, traders often use 20 and 80 as thresholds. Below 20 is commonly understood to signal oversold, and above 80 overbought.
As with relative strength index (RSI; see below), these signals are then used as motives to buy or sell. It’s important to note that values above 80 are more consequential than values below 20, because uptrends often see continual new highs (whereas it’s not as often the case for downtrends to see continual new lows).
On-balance volume (OBV)
We’re going to now look at two indicators for volume, the first one being on-balance volume (or OBV). This technical analysis tool helps traders see the positive and negative flow of volume in a given asset over varying periods of time.
OBV simply calculates the running total of up volume and subtracts the down volume for the same period. “Up volume” refers to the volume on a day when the stock was positive, and “down volume” is the opposite case (days when the stock was negative).
When OBV steadily rises, it may provide a good buy signal, as it suggests other traders are buying in and thus pushing the price higher. On the other hand, when OBV falls, selling is exceeding buying, and so it may be a good sell signal.
When price and OBV go up or down together, it can help confirm the up or downtrend.
But when OBV diverges from the price, it may indicate that the trend does not have substantial support from big buyers and could thus more readily reverse.
Volume-weighted average price (VWAP)
Our second volume-oriented technical indicator for day traders is the volume-weighted average price, or VWAP. In essence, VWAP provides an average price based on transaction volume. This gives another angle to value rather than the closing share price alone.
VWAP is plotted as a moving average and is also used similarly to many moving average indicators. If the price trends above or down the VWAP, then it reflects bullish or bearish sentiment, respectively.
VWAP may also indicate overall asset health, as new highs may come with high or low trading volume. As with OBV, a new high with low volume may signal that the uptrend lacks strong backing. Many day traders thus like to use VWAP (alone or with OBV) to have confidence (or not) in a given security’s uptrend or downtrend.
Bollinger bands come from the work of John Bollinger in the 1980s. Bollinger had the idea to use a moving average between two trading bands, spaced a positive and negative deviation apart. Together, they indicate the level of price volatility and how it has changed over time.
Bollinger bands are visually simple to grasp and relatively straightforward to use. The bands provide great pricing information within the already familiar standard price chart.
Most often, traders use Bollinger bands to indicate an overbought or oversold market. When prices break the upper line, the signal is bearish, and vice versa. These movements can thus signal that it’s a good time to sell and buy, respectively.
That said, traders should note that Bollinger Bands alone may not provide the best trading signals. Ideally, the price should continually touch the upper or lower bands to signal a continuing trend. In this way, traders should consider confirming the bullish or bearish signal and/or using other indicators to do so.
Relative strength index (RSI)
RSI is a technical indicator that moves between 0 and 100. It plots recent price gains against recent price losses, which gives traders a grasp on momentum and thus the strength of a given trend.
Traders appreciate the RSI indicator for many reasons. Three of the main reasons include its use as an overbought/oversold indicator, divergence, and for support and resistance levels:
- Overbought/oversold – RSI trending above 70 indicates that a security is overbought (and might decline by consequence). Below 30 indicates oversold (and thus the prospect of a rally). This shouldn’t necessarily signal a buy or sell, however. Rather, it’s meant to inform and give a sense of a stock’s relative strength at any given time.
- Divergence – When RSI diverges from the price chart, the current price trend shows signs of weakness and might reverse at any time.
- Support/resistance – Support and resistance levels are helpful indicators for day traders, and the 30 and 70 levels of RSI cited above are often used as indicators of support (uptrend) and resistance (downtrend).
Best indicators for day trading | Which are best for you?
There are countless technical indicators used for day trading, but which are best for you? Ultimately, it depends on your personal trading style, experience, and goals. Fortunately, some of the best indicators for day trading aren’t too tough to grasp, and traders can use them to analyze any security.
One of the most important things is to remember that very few successful day traders only use one or two indicators. They have numerous indicators in their toolkit and they compare and contrast them to help confirm bearish/bullish (i.e. sell/buy) signals.
To learn more about successful day trading, check out the following day-trading resources so you can trade smarter and optimize your gains:
- The Best Free Trading Journals of 2023
- How to Become a Day Trader
- Scalping Vs. Day Trading
- Humbled Trader Review
- TopStepTrader Review
- TraderVue Review