What are the best day trading indicators?

[Brian Hayslip]

[Sheila Olson]

Not all day traders use technical analysis; they trade on price action alone and do well enough. Most, however, do rely on indicators to screen stocks and identify entry and exit points for trades. Indicators tend to fall into “families,” meaning they convey much the same information about trend strength, for example, or momentum. Because of the built-in redundancy and the potential for information overload, it’s best to stick to just a few indicators and build your trading strategy around them. There’s really no such thing as the best indicator for day trading; it’s entirely a matter of personal preference. However, these are the commonly used indicators for intraday traders.

MACD

MACD is a trend indicator that helps you see which way a trend is developing, if one is present at all. The MACD histogram is simple to read: When it goes up, the market is bullish, and when it falls, the bears are in control. Signals are equally simple to spot—when MACD drops below the signal line, it’s a sell signal, and when it rises above, it signals a buy.

RSI

The RSI is one of the most common oscillators; it measures momentum on a scale of 0 to 100. Readings above 70 suggest an overbought market and below 30 suggest oversold. RSI is extremely useful for helping identify when a trend is poised to reverse so you can capitalize on movement, take your profit, and get out quickly. Keep in mind, however, that not all securities fit the 30-70 range, and may not actually enter overbought territory until 80 or even 90.

Bollinger bands

Bollinger bands are a volatility indicator, which is a necessary characteristic for a good day-trading stock. If the price isn’t fluctuating, there’s not a lot of profit to capture, after all. Bollinger bands consist of a moving average with two lines plotted on either side at two standard deviations. When the bands are narrow, volatility is low; when they are wide, it is high. A Bollinger squeeze may help you predict breakouts and time your trades. Remember that all indicators have their limitations and frequently produce false signal—or fail to produce signals at all. Practice with a simulator or demo account using various indicators until you find the combination that works best for you and your trading style.