Best Indicators for Intraday Trading: What are their uses?

Best Indicators for Intraday Trading Introduction

We all know how dynamic the stock market is as well as the most unpredictable. You never know where the wind is likely to blow in a day.  While some investors play safe by making long-term investments, some like the thrill of Intraday trading. This short-term trading is like a roller coaster ride of 9 hours in the market in which the traders experience the most price fluctuations in the stock market and the risk-reward ratio is sky-high. But there’s a way out to not end up in losses and to be successful in this trading mechanism.

To make a calculative investment in the stock market requires analyzing different charts and making a call based on such patterns and indicators. An investor needs to be proactive in analyzing these technicals using price actions and most importantly intraday trading indicators to make viable profits. 

The intraday indicators provide vital information about market trends and help an investor maximize his returns by keeping risks at bay. It does not matter, if you are a novice or an expert, if you know the tricks of the trade, you can certainly make your way to some lucrative benefits of intraday trading. This article will help you to understand the types of indicators and the important tips while making the use of such indicators.

Summary in Brief:

• Understanding the need for intraday indicators
• Identifying the best intraday indicators for trading
• Suggestions for intraday investors
• FAQs

Need for Intraday Indicators

Intraday indicators help to keep track of the market trends and are most reliable as they are based on calculations and not assumptions. These indicators provide information related to the price movements based on the trends that they study. 

These indicators also help the traders to gain insight into the supply and demand of securities as well as to understand the market psychology. 

Following are some different modes of indicators under which the intraday indicators or tools are categorized:

1. Oscillators: These are generally a group of indicators that tend to move up and down between the upper and lower bound. Widely used indicators of the type indicator include Commodity Channel Index (CCI), Stochastics, Relative Strength Indicator (RSI), and Moving Averages Convergence Divergence (MACD).

2. Breadth indicators: These indicators indicate the behavior of the stock market. They however have an indirect approach on showing how a stock monitor behaves. Examples of these types include Trin, Tiki, Ticks, and the Advance-Decline Line.

3. Overlays: These are the most popular indicators.  These overlay directly on the price movements of the stocks. These also serve a distinct number of purposes and some traders even consider multiple overlays for their best advantage. Some of the popular examples of this type of indicator are Bollinger Bands, Moving Averages, Keltner Channels,  Parabolic SAR, and Fibonacci Extensions and Retracements.

4. Trend: Trend indicators are helpful in capturing gains from the stocks’ momentum in a given direction. These indicators help the trader to highlight the market directions of the stock. They also offer a trader hints on the strength of the market and further establishments on the trend. Moving Averages, OBV, RSI, etc. are some examples of trend indicators.

5. Volatility: As per the reports on the market conditions, these indicators explain the extent of price fluctuations over a given period. When volatility is indicated high, the price swings of the stock are expected. While low volatility indicates price fluctuations to be more subtle, one could use indicators to understand volatility  Bollinger Bands and  Average True Range.

6. Volume: This indicator mainly relies on trade volumes. They combine the volume data with the price data and help to indicate the strength of a trend. The most popular indicators of the kind are Chaikin Money Flow and On Balance Volume (OBV).

Best Intraday Indicators for Trading

Intraday trading is popularly done on financial assets such as stocks, currency, derivatives, or commodities that are actively traded in the stock market. Let us understand some of the most popular intraday indicators used by traders to earn huge profits by minimizing their risks.

1. VWAP

This intraday trading indicator is known as VWAP- Volume Weighted Average Price. While an investor trades intraday, he needs to track down the volume in the stock. VWAP is an accurate volume indicator of the ratio of the value of a stock that is traded at a particular time in relation to the total volume traded at that stock for a particular stock.

2. Stochastics

Stochastic is a momentum that was developed by George C Lane in the 1950s. It is one of the most popular indicators that has been a viable option for intra-day traders for a very long time and is suitable both for intraday trading as well as for swing trading. While intraday trading it is important for an investor to analyze the momentum of a stock in which he is trading.

Stochastic Indicator uses the below formula to make the necessary calculations:

Percentage of K = (Current Close – Lowest Low)/(Highest High – Lowest Low) X 100

Percentage of D = 3-day SMA of %K

Lowest Low = lowest low for the look-back period

Highest High = highest high for the look-back period

Here the default look-back period is taken as 14 days which needs to be changed as per the trading style of a trader, for instance, an intraday trader X can use short period Stochastics. Also, it is to note that trading signals are generated when the %K line of Stochastic crosses the %D line.

3. Bollinger Bands

Bollinger bands are also quite popular stats used by intra-day traders to study the volatility in the market. Bollinger bands are typically of 3 types: a middle bang, which is a 20-day simple moving average, a +2 standard deviation upper bang, and lastly a -2 lower deviation lower band. The price of a stock fluctuates between the upper and the lower bands. When the market is moving and the volatility is high, the band tends to widen, and while on low volatility, the gap accordingly decreases. Bollinger bands help the intraday traders to gauge the price range of an identified stock. The widening and narrowing of the band also enable traders to hunt the market momentums and take the trade at the best possible price to earn maximum returns.

4. The relative strength index (RSI) 

This indicator moves between 0 and 100. It plots recent price gains in relation to recent price losses. The RSI levels, therefore, are a great deal in sensing momentum and the market trend strength. 

Also, one of the most basic uses of an RSI is its ability to be used as an overbought and oversold indicator. This means that when RSI moves above 70, the asset is considered to be overbought and is likely to decline. However, when the RSI moves below 30, the asset is said to oversell and may rally. However, these assumptions must be made with caution therefore, some traders wait until the indicator rises above 70 and as it drops below before they sell or when it drops below 30 and it rises back above before they buy. 

RSI is also widely used for divergence. When this indicator is moving in a different direction from that of the price, it appears that the current price trend is weak and may soon reverse.

RSI is also used for support and resistance levels. During the uptrends, a stock is often held above the 30 levels and frequently reaches 70 or above. While in a downtrend, the RSI  typically is held below 70 and frequently reaches 30 or below.

5. On-Balance Volume

On Balance Volume (OBV) is again a well-liked volume indicator that tracks absolutely the volume modification for speculating worth movement. Most traders believe that the volume drives costs owing to aggressive trades from institutional investors. Thus, the final Volume indicator helps us in chasing this good cash flow into the market and additionally signals future worth direction.

If there's a modification in OBV price that's beyond a modification in worth for a given fundamental measure, then we have a tendency to may even see a pointy upper side or drawback in worth within the close future.

An important note: Traders do not use a single indicator only but a combination of a few. This helps them to narrow down the traders with high success probabilities.

Suggestions for intraday investors

These technical indicators are fundamentally essential for intraday commerce however, one ought to conjointly keep in mind that they ought to not trade supported just by one intraday technical indicator. An investor must make note of the fact that in order to discover their best intraday trading strategy, they need to use a mix of these indicators. For instance, one may consider a momentum indicator for volatility and a volume indicator. Using these suggestions to the best of their ability shall make an investor take a big jump in his mission of gaining financial freedom.