How to Choose the Best Indicators to Use for Day Trading

by: Mohammad Hafiz
how to choose

When you start trading, you always need some technical helpers which will tell you: “Hey! Here is a nice entry point. Ans here’s an exit point, take profit, man!” These are technical indicators (and those that are mentioned in this article are even the best Forex technical analysis indicators). They help you in defining a trend and calculating when it’s better to enter/exit from the market. Choose them wisely, as your success often will depend on them.

Remember that the ‘more is better’ approach doesn’t work here, as too many technical indicators will just confuse you. And finally, you get just lost in a plenty of them.

Trading with indicators VS no indicators at all

They help to work with the price movements, though some traders don’t use them at all. In fact, they aren’t required for earning the profit. Those who can read the price charts have no problem with identifying patterns. For others, technical indicators are a sort of helpers in finding them. They just make patterns more obvious. Still, they can interfere or even spoil your trading, for example, if they show you a reversal too late.

In general, I can’t say if they are good or bad. Everything depends on the manner of using. The best technical analysis indicator may be a wrong instrument in the hands of a layman.

What is over-optimization?

The downside of trading with many technical indicators is confusion and reducing the effectiveness of trading. The most systems use common technical indicators and their work is based on the past results. They don’t consider the future changes in the market behavior, so they may be not efficient at all. You can optimize them, taking into account the principle “A always causes B”, but the main task is not to over-optimize.

The way to do it is using the standard indicator settings. Try not to reinvent a wheel and work with indicators as they are, but look how they work. I’ll tell you how to deal with different types to make the maximum profit.

Types of the best Forex and stock chart indicators

Firstly, there are 2 categories of technical indicators can be divided to: leading and lagging. After that, I can name 5 types that can be categorized:

  1. Trend technical indicators (lagging) tell us the vector of the market movement.
  2. Mean reversion ones (lagging) show us how the quotes swing will stretch before a retracement.
  3. Relative strength ones (leading) show oscillations between the buyers/sellers pressure. The best oscillator indicator can help you greatly in your trading.
  4. Momentum technical indicators (leading) tell us about the speed of the price changing.
  5. Volume ones (lagging or leading) show whether bears or bulls control the market.

The main goal of any beginner is setting technical indicator correctly in order to get effective signals.

Now, after you have already learned the ways the best indicators to use for day trading work, let’s find out which one is the best for novices!

Moving Average trend indicators

Moving Average is one of the best trend technical analysis indicators. It works well on different time intervals (H4, D1, W1 or intraday). The most popular types are exponential moving averages (EMA) or simple moving averages (SMA). They are responsive and give accurate results.

For intraday trading, I would recommend using 15-20 EMA or SMA. 50 MA and 200 MA can help to filter the trend on larger timeframes (H4-D1).

moving average indicators

Bollinger bands mean reversion indicator (20, 2)

Of course, there are some hidden levels which make counter waves or retracements move. Bollinger bands help to notice the turning points. It measures how far the quotes go from a central pivot point. The bands also tend to expand in case of volatility fluctuations. It means that a hidden force won’t interfere rapid price movements. I personally use this one and can confirm that this is one of the best reversal indicators.

bollinger bands

Oscillator indicators

Stochastic Oscillator and Relative Strength Index are the most popular oscillator indicators. They are one of the best oscillator indicators. Buy&sell cycles of the market can be identified with these indicators (or any other relative strength one). Such cycles usually come to their peaks at the oversold or overbought levels, and then the price shifts to the opposite direction. These ones work perfectly for flats.

You can also search for more oscillator indicators, as this is not the only one.

oscillator

MACD (Moving Average Convergence/Divergence) momentum indicator

This one is helpful for novices, as it shows rapid changes of the price. It measures the speed of the market movements. The signals for buying and selling emerge when this indicator reaches its peak and goes the opposite direction (to the zero line). This Forex indicator also helps to identify the strongest reversal figure, the divergence of price and MACD.

macd

On-Balance volume indicator (OBV)

You can keep this indicator under the price bars to look at the current levels of interest for an exact asset on the market. You can use 50-day data to see how the price reveals the trends and if they match the historical data. OBV is often called the best Forex technical analysis indicator. And I can agree with it, it is really useful.

obv

Conclusions

Focus on the main steps of market research: trend, volume, relative strength, mean reversion, momentum. Choosing the right combination of technical indicators gives a nice opportunity of profitable trading. Take one indicator from each category and don’t lose a chance to earn more money!

I hope my article about the best oscillator indicators, volume and reversion ones, and also the best reversal indicators will help you in getting profit!

P.S. A couple of additional tips for your Forex trading:

Do you know 80/20 rule? It says that 80% of results are caused by 20% of efforts. This can be applied to any sphere of our life, including trading. So, if you choose this comfortable approach for your work with charts, you’ll be able to get even more results!

I mean, don’t waste your time on getting more and more charts, as a couple of indicators may be enough and they may work better than tens of them.

Add here the KISS rule and with 80/20 they will give you the best performance.

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