Intraday is a short-term trading in which the traders take advantage of price fluctuations in the stock market to gain profits. But in order to be a successful trader in this technique we need to analyse the technical charts everyday and make decisions based on patterns. We can make use of price actions and intraday trading indicators to do this. Various financial assets such as stocks, derivatives, currency or commodities can be traded in the intraday market. Nse Trader is the best trading software in India.
Technical Indicators or “technicals” help in the technical analysis of stocks. They have absolutely nothing to do with calculating the fundamentals of a share such as earnings, profit margins, or revenue of the company. Technical intraday indicators can be most effectively used to identify good entry points and exit points for a stock by analysing long term trends.
Intraday indicators are found overlayed on analysis charts to provide vital information through calculations. These indicators indicate price movement so that you can generate profit at the end of the day. Here are some crucial aspects that can be helpful indicators while trading:-
- Market Trend Indicators
These intraday trading indicators indicate the direction towards which prices are moving. Generally the trend tends to oscillate in between high and low values.
- Momentum Indicators
Momentum indicates the strength of the trend. And also signal whether there’s a chance of reversal. Relative Strength Index (RSI) is one of the indicators of momentum used to indicate the price limits.
- Volume Indicators
Volume indicators indicate how the volume (number of stocks bought and sold) changes with time. When prices fluctuate, volume indicates how strong the shift is. For example : On-Balance Volume.
- Volatility Indicators
Volatility is extremely crucial as it indicates how much the price of a stock is changing over a given time period. High volatility indicates big price movements, whereas lower volatility indicates less dramatic price movements.
Now let’s explore some of the most popular Intraday Trading Indicators:-
1.Moving Average Convergence Divergence / MACD
Besides Daily Moving Averages (DMA), MACD is the most popular and commonly used intraday trading indicator out there. It not only signals trends of a stock but also predicts momentum by comparing long-term and short-term momentum of the stock. It compares two moving averages (typically, day 12 and day 26 DMA of the stock).
Moving averages indicator is a line on the stock chart that shows the average closing rates of a stock over a given period of time. It helps traders comprehend the underlying movement of stock prices. It helps smoothen the volatility to provide a better understanding of the market direction.
Volume Weighted Average Price is an intraday indicator that helps traders track the volume in the stock. More specifically, VWAP is an indicator of the ratio of the average price of a stock traded at a given time to the total traded volume over a given time. It shows a Bullish trend when the price of the stock is above the moving average. Meaning, when the price is above average volume, the trend is positive. This indicator helps investors decide whether to go with an active or a passive approach to position entries.
3. Bollinger Bands
Bollinger bands is one step ahead of DMAs as it comprises three lines– the moving average, upper limit and lower limit, representing the volatility of the market. The price of a stock moves between the upper and the lower band. When the market is moving and the volatility is more, the band widens and when it is less the gap between the bands narrows down. These Bollinger bands help traders to understand the price range of a particular stock.
4. Relative Strength Index (RSI)
Relative Strength Index (RSI), a momentum indicator is a single line ranging from 0 to 100. It indicates when a stock is overbought and oversold in the market. An RSI reading over 70 indicates an overbought market and one below 30 indicates an oversold market. RSI also helps estimate the direction of the market trend. RSI above 50 indicates uptrend of the market and RSI below 50 indicates downtrend of the market.
- Commodity Channel Index (CCI)
The Commodity Channel Index recognises new trends in the market. It has three values– 0, +100, and -100. When the value reads positive, an uptrend is indicated. When the CCI reads negative, it indicates that the market is downtrend. CCI, coupled with RSI can be used to obtain information about overbought and oversold stocks.
The stochastic oscillator is one of the momentum indicators that compares the closing price of a stock to the range of prices it was subjected to over a period of time. Stochastic was developed by George C Lane in the 1950’s and can be calculated using the formula below.
%K = (Current Close – Lowest Low)/(Highest High – Lowest Low) * 100
%D = 3-day SMA of %K
Lowest Low = lowest low for the look-back period
Highest High = highest high for the look-back period
The trading signal is generated when the %K line of Stochastic crosses %D line.
Also, the look back period can be set according to the traders will.
6. On-Balance Volume
On Balance Volume (OBV) is another popular momentum indicator that helps to track the absolute change in volume and predict the price movements. It is the perfect tool to predict breakouts and breakdowns.
OBV makes a distinction between smart money (institutional investors) and retail investors who are less aggressive. drives price because of the aggressive trades from institutional investors. Most traders believe that volume is the key force behind markets. When volume drives the price upwards, large investors begin selling, and small investors start to buy. Therefore, the On Balance Volume indicator helps us track the smart money flow into the market.
7. Donchian Channel
When practising intraday trading, there’s a need to analyse the volatility of the stock prices. The Donchian channel is constructed by measuring the Highest High and Lowest Low for a predefined period. When there is a breakout of the Donchian channel from the upper or lower bands, it may be considered as the start of a new trend. A narrow Donchian channel indicates a stable market, whereas price fluctuations will cause the channel to be wider.
8. Average Directional Index (ADX)
Average Directional Index indicator helps traders determine whether the ongoing market trend is going up or down. The value of ADX represents the strength of the trend. Generally, an ADX value below 25 is indicative of a very weak trend and above 75, a very strong one. To filter out false signals,ADX is coupled with other trend-following indicators such as the Supertrend indicator.
Whether you’re a novice trader who’s just starting off, or an experienced one, indicators are crucial for the best intraday trading strategy. Even the best investors in history have relied on technical indicators to gain insight on the securities of a stock, and predict crowd mentality for the trade.
The stock market is dynamic, and current affairs and geopolitical events also heavily affect the market situation. Knowledge of the above mentioned indicators helps in accurate intraday trading. It provides useful information about the market trend and helps you to maximise your returns on investment. To successfully be an intraday trader, the use of one indicator will probably not be enough for active traders. Depending on the trading strategy, it is best recommended to find the indicators that fit your strategy. Using intraday trading indicators will help you avert risks and make decisions pertaining to technical analysis and sentiments of the market on that day.