There are many trading indicators that you can use when day trading. If you feel like it, you can use the MACD, RSI, moving average, Bollinger Bands, stochastics, and other indicators all at once. However, you should pick the best one for your trading strategy. Let’s see how you can find the right—and the best—trading indicator for you.
Should you really use one?
If you try to survey many other day traders, you would find out that a lot of them do not use indicators at all. Indicators, technically, are mere chartings of price data or volume data.
In fact, some claim that indicators are not really a requirement to make your trading profitable. If you practice trading relying on price action enough, you would not need indicators that much. However, indicators can help you see things that you won’t see easily on price charts alone.
Just imagine: the price is in an uptrend. Then, you notice that it loses momentum. If you’re not so keen on reading price action, you wouldn’t possibly see that change easily. Here’s where indicators help you—you would notice that slowdown more quickly than by just looking at simple price charts.
Meanwhile, indicators also sport their own inherent problems. They may signal market reversals too soon or too late, for one. However, you must remember that their effectiveness depends ultimately on how you use them.
A Combination of Trading Indicators
If you’re going to use indicators, you can try to pick indicators to help you pick entry and exit points. One for each.
For instance, using the relative strength index can help you isolate the trend and entry points. During an uptrend, the RSI should extend above 70 on rallies. For the case of downtrends, it should hover above 30. This can help you confirm the trend as well as isolate trading opportunities. You could also get a heads up when the market changes direction.
For exits, a moving average, ATR stops, or moving average envelopes could give you a boost in your exits. For instance, you could use one of these as a trailing stock loss on trending trades. If you see the trend is up, aim to exit if the price slides below the line.
As you see, you can use one indicator in conjunction with another one. You have to try experimenting. This way, you can stumble upon the perfect combination of indicators that will best suit your trades and your strategy.
You also have the choice to calibrate indicators to suit cetain assets, time frame, and trading strategy. The indicators have a default setting, which may not be best for you. So change them to make sure they give you the best hints for the trades. Of course, market conditions change. That means your indicators should also be changed accordingly.
There’s really not one best combination of trading indicators to fit all kinds of traders. You should also consider things about yourself, such as the depth of your knowledge about each indicator, your patience, and your ability to detect changes quickly. Overall, the right and the best indicators will depend on your ability to utilize them accordingly.