Best Day Trading Indicators
Which are the best indicators for your broker platforms in day trading, and how exactly do you use them?
As someone who's been day trading for a good seven years now, I’ve certainly gone through tons of indicators from MACD, RSI, ichimoku clouds, simple and exponential moving averages, VWAP, bollinger bands and the list just goes on and on.
I personally do not recommend relying on indicators anymore. I prefer to have my charts really clean without layers of indicators, and I will explain why in the later parts of the article.=
However, if you are a beginner day trader, using indicators is a good way to start learning to plan your entries/exits and start building a trading strategy.
In this article, we’ll be talking about the most popular trading indicators out there for new traders and how to best use them in your trading strategies.
Indicator 1: MACD
MACD stands for Moving Average Convergence Divergence.
This is a trend indicator for short-term trading, meaning that it tells you when there is potentially a reversal of direction coming soon for the stock.
If you see a stock going straight up for a while, many traders would use MACD to time the reversal to short sell, when the stock starts selling off and pulling back. It‘s the same thing when the stock has been selling off aggressively; many traders will use MACD to time the bounce.
There’s going to be two lines, and basically when the two lines, the blue being the fast line and the white being the slow line, crosses each other, that's where the stock starts to change trend. The histogram with a pretty looking green and red graph will start to disappear.
When the blue line crosses over the white line and the histogram turns red to green, a particular stock starts trending up higher, and when the blue line crosses beneath the white line and the histogram becomes red, the stock is slowly selling off to the downside.
Here are some tips I have for you if you decide to try out this MACD indicator. This works best on higher time frames, ideally over 5 or 10min charts.
The reason is because since this is a trend indicator, you need more time for the stock to form trends and for all the data and volatility to catch up. If you use MACD on a 1 or 2 min chart, you will get a lot of false confirmations.
Another tip I have for you is to add another indicator to this beginner strategy.
Indicator 2: RSI
The second indicator that's friendly for new traders is RSI. RSI stands for Relative Strength Index and is a momentum indicator that tells you when a stock is overbought, which is when the line crosses above 70-90, meaning there is too much buying to the upside. This means we could potentially be exhausting the buyers and we’re near the top
It could also tell you when a stock is oversold, which is when the line dips below 30, meaning that there is too much emotional selling and we are near a bottom level. Therefore, the stock could start to bounce.
You can set this up again in TOS, and just stick with the default settings.
The whole purpose of using the RSI indicator is to pick the top and bottom of a stock on wider timeframes. It actually sounds kind of similar to the trend reversal with the MACD indicator, which is why people like to pair these two indicators up in day trading.
Just by itself, MACD is a lagging indicator, meaning it takes a while for the fast line and the slow line to decisively converge. RSI, on the other hand, tends to be early just by itself, in my opinion.
When you see the RSI start turning red above the 70 zone, double check your MACD indicator, and see if the fast and slow lines are still far from crossing. Once you see those lines slowly crossing, that could serve as a confirmation to RSI.
That’s why it’s a good idea to combine your RSI indicator with your MACD. When you see the lines on your MACD start to cross and the RSI is trending higher, this is the time to start looking and observing for an entry on the long side.
Using this RSI and MACD indicator pair can provide you information where there is a potential reversal coming, but they still require you to be patient and wait for confirmation, instead of jumping in right away.
Earlier, we mentioned the first tip for using this MACD and RSI indicator pair, which is to use higher time frames like 5 or 10 min. The second tip I have for this same indicator pair is, use it only for large-cap stocks.
Large Cap Stocks
When I used this indicator pair in my first 2 years in trading, I personally found this indicator pair to work better when trading mid and large caps. It is not so great for trading volatile low float small cap stocks, because those small caps don’t trend as well. As a result, you get a lot of fake breakouts, and a lot of times you can face sudden rug pulls.
Is this RSI and MACD indicator going to give you a 100% win rate all the time? Absolutely not; nothing is 100% guaranteed in day trading.
Indicator 3: VWAP and Volume
I find the better indicator pair to use for trading lower float small cap stocks is VWAP and Volume. This indicator pair is the only set I have on my charts.
VWAP stands for Volume-Weighted Average Price. It indicates the relative strength or weakness of a stock accounting for the amount of volume the stock is trading.
Let’s learn how to set up this VWAP indicator first. You can add VWAP in the thinkorswim studies settings. I always just use the default settings, and I never try to change any of the numbers up there. You can change the colors if you want to as well. It’s very important you make sure to turn off the upper band and lower band. Let’s put this into practice with some examples.
GGPI
If a stock is trading above VWAP, that means it's bullish, and the majority of the volume are the buyers. This is especially the case when it's creating higher lows above VWAP. At that point, it’s uptrending.
Now we take into consideration the volume. Does the uptrending stock have consistent and ideally increasing in volume? If the answer is yes to all of the above questions, then look for entries on pullbacks.
MARA
Let’s consider the reverse scenario. If a stock is breaking beneath VWAP, that means it's weak, and the sellers have control of the stock. If you apply that with observing the selling volume, you get a no bounce city straight down. As a result, the stock just broke down multiple supports.
That is simply just the most general way people use VWAP. It's a guide to indicate whether the stock is a bullish short term or bearish short term.
Conclusion
Now that we’ve gone over the two pairs of indicators I recommend using, you must be wondering, “ok Shay, why are you no longer using any of these fancy pretty indicators now? Why only VWAP and volume? I thought more indicators mean you make more money.”
The truth is, all these indicators look picture perfect in hindsight after the move has finished. It's just like memorizing patterns. These things do not provide you the little nuances regarding who is trapped in pain and where the momentum is going.
It’s all about baby steps right? Using a lot of indicators in day trading is like having training wheels when learning to ride a bike. They're perfectly fine to start for beginner traders, but you will eventually outgrow them as a trader.
The only indicator I leave on my chart nowadays is VWAP and volume, and Elon’s Twitter account, of course.
