7 Best Indicator for Intraday Trading

Traders use technical indicators to understand the supply and demand of securities and market psychology. These indicators form the foundation of technical analysis. Metrics like trading volume offer hints about the potential continuation of a price movement. By analyzing these indicators, traders can generate signals to determine when to buy or sell securities.

Seven of the Best Indicator for Intraday 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 have to use all the technical indicators, but instead choose a few that you find useful for making better trading choices. Gain a deeper understanding of how these indicators function and how they can assist you in achieving successful day trading.

KEY TAKEAWAYS

  • Technical traders and chartists have a range of tools, including indicators, patterns, and oscillators, to generate signals for their trading strategies. These tools may examine price history, trading volume, or momentum.
  • Traders often use these tools in combination to make informed decisions. In this article, we explore seven essential tools that market technicians use, which you should become acquainted with if you intend to trade using technical analysis.

Tools of the Trade

Day traders and technical analysts utilize specific tools to aid their decision-making process. These tools, known as charting tools, provide signals for buying or selling securities, as well as identify trends or patterns in the market. Generally, there are two main categories of technical indicators that traders rely on.

1.Overlays: Technical indicators that share the same scale as prices are plotted on top of the stock chart. These indicators include moving averages, Bollinger Bands, and Fibonacci lines.

2.Oscillators: Instead of being placed directly on a price chart, technical indicators that oscillate between a minimum and maximum value are plotted either above or below the price chart. Examples of such indicators include the stochastic oscillator, MACD, and RSI. In this article, we will primarily focus on these types of technical indicators.

Traders often combine multiple technical indicators to analyze a security. With a wide range of options available, traders need to select the indicators that suit them best and understand how they function. Traders may also integrate technical indicators with subjective forms of technical analysis, such as studying chart patterns, to generate trading ideas. Due to their quantitative nature, technical indicators can also be integrated into automated trading systems.

1. On-Balance Volume

Let’s start with the on-balance volume indicator (OBV), which measures the positive and negative flow of volume in a security over time.

The OBV indicator is calculated by keeping a running total of up volume minus down volume. Up volume represents the volume on days when the price of the security increased, while down volume represents the volume on days when the price decreased. Each day, the volume is added or subtracted from the indicator based on whether the price went up or down.

When the OBV is rising, it suggests that buyers are actively participating and driving the price higher. Conversely, when the OBV is falling, it means that selling volume is surpassing buying volume, indicating potential lower prices. In this way, the OBV acts as a tool to confirm the trend. If both the price and OBV are rising, it strengthens the indication of a continued upward trend.

Traders who utilize the OBV also pay attention to divergence. This occurs when the indicator and the price are moving in opposite directions. For instance, if the price is increasing but the OBV is decreasing, it may suggest that the trend lacks strong buyer support and could potentially reverse soon.

Best Indicator for Intraday Trading

2. Accumulation/Distribution Line

One of the commonly used indicators for assessing the flow of money in and out of a security is the accumulation/distribution line (A/D line).

Similar to the on-balance volume indicator (OBV), the A/D line takes into account not only the closing price of the security but also the trading range for the period and where the close is in relation to that range. If a stock ends near its highest point, the indicator assigns more significance to the volume compared to when it closes near the middle of its range. These different calculations mean that the OBV may be more effective in certain situations, while the A/D line may work better in others.

If the A/D line is trending upward, it indicates buying interest as the stock is closing above the midpoint of its range. This confirms an uptrend. Conversely, if the A/D line is declining, it means the price is finishing in the lower portion of its daily range, suggesting negative volume. This confirms a downtrend.

Traders who utilize the A/D line also pay attention to divergence. If the A/D line starts to decline while the price is rising, it signals that the trend may be in jeopardy and could potentially reverse. Similarly, if the price is trending downward and the A/D line begins to rise, it could indicate the possibility of higher prices in the future.

Best Indicator for Intraday Trading

3. Average Directional Index

The average directional index (ADX) is a trend indicator used to assess the strength and momentum of a trend. When the ADX value is above 40, it signifies a high level of directional strength in the trend, whether it is an upward or downward trend based on the direction of the price movement.

If the ADX indicator falls below 20, it suggests a weak or non-trending market with a lack of clear direction.

The ADX is represented by the main line on the indicator, typically displayed in black. Additionally, there are two optional lines known as DI+ and DI-. These lines are commonly colored red and green, respectively. All three lines work together to indicate both the direction and momentum of the trend.

  • ADX above 20 and DI+ above DI-: That’s an uptrend.
  • ADX above 20 and DI- above DI+: That’s a downtrend.
  • ADX below 20 is a weak trend or ranging period, often associated with the DI- and DI+ rapidly crisscrossing each other.
Best Indicator for Intraday Trading

4. Aroon Indicator

The Aroon oscillator is a technical indicator used to determine if a security is in a trend and specifically whether the price is reaching new highs or lows within a given period (typically 25).

Moreover, the Aroon oscillator can help identify the start of a new trend. It consists of two lines: the Aroon Up line and the Aroon Down line.

When the Aroon Up line crosses above the Aroon Down line, it indicates a potential change in trend. If the Aroon Up line reaches 100 and remains close to that level while the Aroon Down line stays near zero, it confirms an uptrend.

Conversely, if the Aroon Down line crosses above the Aroon Up line and remains near 100, it suggests a downtrend is in progress.

 

Best Indicator for Intraday Trading

5. MACD

The moving average convergence divergence (MACD) indicator is a tool that helps traders identify the direction of a trend and its momentum. It also generates various trade signals.

When the MACD is above zero, it indicates an upward trend in the price. Conversely, when the MACD falls below zero, it suggests a bearish trend.

The MACD consists of two lines: the MACD line and a slower-moving signal line. A crossover occurs when the MACD line crosses above or below the signal line. When the MACD line crosses below the signal line, it suggests a price decline, while a crossover above the signal line indicates a price increase.

By considering which side of zero the MACD indicator is on, traders can determine which signals to follow. For instance, if the indicator is above zero, paying attention to the MACD line crossing above the signal line may indicate a buying opportunity. Conversely, if the MACD is below zero, a crossover where the MACD line falls below the signal line could indicate a potential short trade signal.

Best Indicator for Intraday Trading

6. Relative Strength Index

The relative strength index (RSI) serves several main purposes. It measures recent price gains versus losses and ranges between zero and 100, aiding in the assessment of momentum and trend strength.

One primary use of the RSI is as an indicator of overbought and oversold conditions. When the RSI surpasses 70, it suggests the asset is overbought and may experience a decline. Conversely, when the RSI falls below 30, it suggests the asset is oversold and may undergo a rally. However, relying solely on this assumption can be risky. Some traders prefer to wait for the RSI to rise above 70 and then drop below it before selling, or drop below 30 and then rise back above it before buying.

Divergence is another application of the RSI. When the indicator moves in a different direction than the price, it indicates a weakening of the current price trend and potential reversal.

The RSI can also be used to identify support and resistance levels. During uptrends, a stock typically remains above the 30 level and often reaches 70 or higher. Conversely, during downtrends, the RSI tends to stay below 70 and frequently drops to 30 or lower.

Best Indicator for Intraday Trading

7. Stochastic Oscillator

The stochastic oscillator is a tool that compares the current price to the price range over a specified number of periods. It is plotted on a scale ranging from zero to 100. The concept behind it is that during an uptrend, the price should be reaching new highs, while in a downtrend, the price tends to reach new lows. The stochastic oscillator tracks whether this is happening.

The stochastic oscillator moves relatively quickly, as it is uncommon for the price to consistently reach either extreme (near 100 or zero). Therefore, it is often used as an indicator for identifying overbought and oversold conditions. Values above 80 are considered overbought, while levels below 20 are deemed oversold.

When using overbought and oversold levels, it is important to consider the overall price trend. For instance, during an uptrend, if the indicator falls below 20 and then rises above it, it may be a potential buy signal. However, rallies above 80 are less significant in an uptrend, as it is expected for the indicator to regularly reach 80 and above. In a downtrend, watch for the indicator to rise above 80 and then drop back below it, indicating a possible short trade. The 20 level is less significant in a downtrend.

Best Indicator for Intraday Trading

 

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