Active trading might seem like a new concept to some people, but the reality is that it’s anything but. Research shows that day trading has become more popular, especially since the pandemic, because people were willing to try their hand at making money in their spare time. You’ve likely heard of numerous people scrambling to become day and swing traders.
Day and swing trading can be lucrative if you know what you’re doing. However, you must note that every successful day trader uses technical analysis to find profitable trading opportunities. You cannot become a successful day trader by choosing trades at a whim. You must do your due diligence and research properly, which requires using technical indicators.
What are Technical Indicators?
While most passive investors use fundamental analysis to evaluate a commodity, active traders use technical indicators instead because they help determine the ideal trading opportunities based on historical price data. Fundamental analysis measures a commodity’s intrinsic value via economic or financial data. However, technical analysis has a different approach.
Technical indicators are pattern-based signals derived from a commodity’s historic price, volume, etc. They use these factors to determine a commodity’s strength or weakness. Technical indicators are useful for day traders because they help analyze short-term price movements. They can also be used to identify profitable entry and exit points.
The Top Technical Indicators Day Traders Use
Here are the top technical indicators day traders use to identify profitable entry and exit points and maximize their profits. They include:
Relative Strength Index
Day traders frequently use the relative strength index (RSI) because it’s a helpful indicator that helps identify overbought or oversold conditions for a commodity. J. Welles Wilder Jr. created the Relative Strength Index (RSI). He devised the index to determine the ideal opportunities to buy and sell commodities.
The RSI determines if a commodity is overbought or oversold by measuring its price momentum. The index measures commodities on a scale of zero to a hundred. According to Welles Wilder Jr., a commodity with a momentum of 30 or under was oversold, meaning it represented a profitable buying opportunity for traders. On the other hand, a commodity with momentum reaching 70 or above was overbought, representing a short-selling opportunity for traders.
Most traders recommend utilizing the RSI when signals conform to the price trend. For instance, search for bearish momentum signals if the price trend is bearish. However, ignore such signals if the price trend is moving upward.
Moving Average Convergence and Divergence (MACD)
Moving Average Convergence and Divergence (MACD) is another helpful indicator that helps recognize price trends. It consists of two chart lines. You can derive the MACD line by subtracting a 26-period exponential moving average from a 12-period exponential moving average. Doing so is important because the exponential moving average refers to an asset’s average price over a specified period.
In addition, the MACD also contains a signal line, which is a nine-period EMA. The MACD signals bearish trends when the MACD line is below the signal line. On the other hand, it represents a bullish trend if the MACD line is above the signal line.
Bollinger Bands
Bollinger bands are also a useful technical indicator that day traders actively use. You’ll find them helpful if you’re new to options trading. These bands help determine if a commodity’s price is high or low and provide invaluable insight into the commodity’s volatility. Bollinger bands feature three lines. The top line is created by doubling the middle line’s daily standard deviation. The middle line uses a 20-day simple moving average, while the bottom line is determined by subtracting twice the daily standard deviation.
Bollinger bands help traders by helping them determine if a commodity is overbought or oversold. In addition, these bands also tell traders about a price envelope.
Exponential Moving Average
The exponential moving average is also a lagging indicator that day traders often use. It helps find trends over time. Unlike the simple moving average indicator, exponential moving averages emphasize current trends. As a result, using the exponential moving average can help day traders find trends earlier than simple moving averages because the former reacts faster to price changes.
Stochastic Oscillator
The Stochastic oscillator is another popular momentum indicator that day traders use. Developed by George Lane in the 50s, it helps find overbought and oversold levels. Since the Stochastic oscillator is a range-bound indicator, it contains figures between zero and a hundred. A range of 80 and above represents oversold levels, while a range below 20 represents overbought levels.
Fibonacci Retracements
Fibonacci retracements are another indicator day traders can use to make informed trading decisions, leading to greater profitability. Fibonacci retracements identify support and resistance areas along a line between a low and high price. They also have six support and resistance levels along the trend line. They include zero percent, 23.6, 38.2, 50, 61.8, and 100 percent. Fibonacci retracements are also invaluable because they indicate support and resistance levels where prices might reverse.
Get Started with Trading Alphas
Making profitable trades without the right guidance is challenging. However, that’s where Trading Alphas can help.
The organization has a diverse community of over 1000 members and has helped its community make over $25 million in profits by operating one of the best options trading Discord servers.
Consider checking out their website for more information. You can also contact them to learn more or sign up as a member today.
About The Author
James St. Patrick grew up in Harlem, NY. He has always harbored an interest in trading options, stocks, etc. He’s also affiliated with Trading Alphas.
