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.
- 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.
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.
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.