The Best 5 Technical Indicators for Profitable Trading
Welcome to the top 5 technical indicators for profitable intraday trading.
By the end of the article, you’ll have a good understanding of how people use technical indicators to trade with, with the examples we provide.
- Technical indicators can be very confusing and daunting for beginner traders.
- They don’t have to be, and in this video give you a basic understanding of them as useful technical indicators to help you make a profit in the markets.
- Firstly, all the indicators we are going to show you or created from basic candlestick data.
- They all take their data from the essential worth of motion. The open, high, low, and close data.
If you need to learn more about the basics of candlesticks then please click here and watch our three-part candlesticks series here are some of the most common mistakes traders make with technical indicators.
- Don’t overload your screen of indicators. Only display the indicators on the charts that you’ll actually use.
- A lot of traders overload the charts with indicators as an excuse to over trade. Remember, indicators are an indication of something happening in the market. They aren’t a crystal ball trying to predict the future.
- Don’t blame the indicators when a trade doesn’t work out no matter which indicators you use you will still need to take losses in trading.
The two types of indicators. There are two main types of markets trending and range bound or sideways markets.
A trending market looks like this where the market is moving in one direction, a range-bound or sideways market looks like this,
Where the market is moving up and down within a specific range indicator tend to be suited to either trending or range-bound in sideways markets.
RSI the Relative Strength Index compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of the instrument.
- As you’ll be able to see from the chart, the RSI ranges from zero to 100. An instrument is deemed to be overboard as soon as the RSI approaches a 70 stage which means.
- That it may be getting overvalued and is a good candidate for a pullback or reversal.
- Likewise, if the RSI approaches 30 is an indication the instrument may be getting oversold and therefore likely to reverse.
- Traders will often use the RSI either coming back out to its overbought or oversold areas as a signal or partial signal to enter a trade.
- As we can see, the RSI is often accurate when indicating when a market will reverse.
- A trader using RSI should be aware that large rallies and drops in the price of an instrument will affect the RSI by potentially creating false buy or sell signals.
Traders often combine the RSI with other indicator signals such as MACD crosses.
Indicator 2: MACD.
The Moving Average Convergence/Divergence is one of the most well known and used indicators in technical analysis.
- This indicator is made up of two exponential moving averages which help measure momentum and an instrument.
- These moving averages and the changing distances between them become the MACD.
- Convergence simply means the moving averages are moving close together, and divergence simply means they’re moving away from one another.
- When the shorter-term shifting common is above the longer-term shifting common.
- This space of the indicator will present exercise when the shorter-term shifting common is under the longer-term shifting common.
- This area of the indicator will show activity.
- The centerline, of which the MACD has plotted around, indicates where the moving averages are equal, and when the MACD passes through the centerline this indicates the moving average is crossing.
- The signal line, here in red, is a moving average of the MACD values themselves.
- Typical values for the MACD are 26 and 12 exponential moving averages, and 9 for the signal line.
- The farther apart the moving averages and the greater the momentum, the farther away the MACD will be from the centerline.
- Traders use the MACD and signal line crosses, such as these, to indicate momentum trades.
- You can see how these crosses often match up with market moves.
A trader also uses the MACD crosses to indicate where momentum is coming out of the market and may use it is a signal to exit a trade.
Indicator 3: Bollinger Bands.
A Bollinger Band starts off a simple moving average it then has two standard deviations plotted away from it.
- Now sounds a mouthful, but the important part is because standard deviation is a measure of volatility,
- Bollinger Bands adjust themselves to current market conditions.
- When the markets become more volatile, the bands widen and move further away from the average.
- During less volatile periods the bands contract, moving closer to the average.
- The tightening of the bands is often used by technical traders as an early indication that volatility is about to rapidly increase as volatility often follows periods of lack of volatility.
- The market spent more often than not throughout the bands and when the value motion reaches the sting of the bands,
- It is often more likely to reverse and come back into the range. This is used as a signal by reversal traders to take a trade.
This is similar to the oversold and overbought conditions of the RSI.
Indicator 4: Super Trend Indicator.
The tremendous development indicator is a wonderful indicator of development direction.
- It can be utilized as a basis of a buying and selling system that’s based mostly on development following.
- One of the most popular ways to use this indicator is to enter the market after a pullback.
- For example, if the market is on a downtrend indicated by red, wait for a green pullback and then re-enter the market once it turns red again.
- The same can apply in up trending markets. Here we can see how this indicator accurately tracks market trends.
It can be refined through the settings to match the specific instrument.
Indicator 5: Confluence.
The last indicator isn’t a new one it’s indicated confluence, which means to use multiple indicators and their signals to take a trade.
Here we have the RSI and MACD we looked at with the RSI moving into overbought territory here.
Remember, that indicates the market will reverse.
However, we want to help us filter out false signals on the RSI so we also look at the MACD to give us confluence.
- We can see is indicating the momentum has come out of the market as far as the market rallying or going up is concerned.
- And we have a MACD cross here. A signal to enter this short trade could be waiting for the RSI sights come back out of the overbought, and also waiting for the MACD cross.
- We can see that those combined signals or an indication that captures this trend.
- We can use the opposite signals to indicate when the momentum is coming out of the market and it’s more likely to reverse and the market to retrace back up the opposite direction of our trade, and therefore is an exit signal.
- In addition to the RSI and MACD signals, we can add further confidence this trade with a Bollinger Band and the Super Trend Indicator.
- We can see the market is at the top of the Bollinger Band here, but we could also wait for the Super Trend Indicator to change right here before taking the short trade.
- And now we have the confluence of four indications. We have an RSI coming back out of overbought.
- We have a MACD cross. We have the market going to the edge of one of the deviations on the Bollinger Band, and we also have the Super Trend turning back to red.
- This is the sort of confluence you should be looking for with technical indicators on various markets to see how you can find opportunities to make profitable trades.
- There are hundreds of indicators a trader can choose from. The five we’ve spoken about on the best ones to developed trading strategies from.
Take note of how the indicators work with certain mark conditions and see if you can see patterns in the market.