Let’s be honest here, there is a -load of indicators out there that do SO many things, it is almost impossible for you to test and try them all out without drawing a valid conclusion, which is the best indicators for day trading.
I think you’ll agree with me when I say:
It’s REALLY hard to find a trading indicator that does everything in one.
In this article, we are going to highlight what we believe are the best indicators for day trading forex and other assets that are liquid enough to trade each day.
By the end of the article, you will have the exact knowledge to go out and try these indicators for yourself and find out which works best for you!
In fact, some of these same indicators helped me find highly-accurate trading opportunities daily – sometimes taking 20-50 pip trades with little effort… I have even automated some of them into an EA!
So here is the fine tuned list of the…:
7 Best Indicators For Day Trading Forex
#7 – Bollinger Bands
Indicator Type: Lagging, Volatility
Ideal Timeframe: Any
Ideal Trade Style: Scalping
What are the Bollinger Bands?
Bollinger Bands are used to measure a market’s volatility. In trading, they are used as dynamic support and resistance areas.
However, not only are they used to measure the volatility but it’s a mean reversion tool.
This means that when the market is trading 2-3 standard deviations away from the mean, there is a higher chance the market will revert to the mean.
This tactic is what made Pairs Trading popular and hugely successful.
How does it work?
The normal set up for a Bollinger Band is a 20-day moving average, plotted in the middle with a 2 standard deviation plot which creates the lower and upper bands.
The main idea for trading Bollinger bands is the fact you look to either take trading opportunities through several means:
Mean Reversion back to the 20-day period line
Bollinger Squeeze – Breakout of the bands
Bollinger Bounce – Price retracement away from the upper bands
Why #7 For Bollinger Bands?
It’s a very versatile indicator for day trading as it works on any timeframe and there are several methods of trading this indicator by itself. Although, it has been around for years – this features at #7 because we believe there are better indicators out there.
You should certainly check out the Bollinger bands if you are looking for the best indicators for day trading.
Download/Install and have a play around on a demo account.
You will find the Bollinger Bands indicator on almost all platforms, free of charge, thanks to its popularity. We recommend you load up a demo account and see how the markets react to the Bollinger bands using past market data.
This is one of the most under-utilised tools available as a trader. Following on from Bollinger Bands, the Linear Regression only focuses on showing the mean price.
You look to profit from the market moving back towards the mean price after extreme market movements.
How does it work?
You plot the near term swing high and swing low like you would with the Fibonacci Retracement tool. This will then plot a line – giving you the Mean Price.
Some tools will also plot the extremes like a channel between the prices. This is super useful as once we see the price around the extremes we can start to take note on whether or not the price will move back to the Mean Price as expected.
Why #6 For Linear Regression?
The Linear Regression tool is SO simple and easy to use, just plotting the line (and most, if not all, tools do this for you automatically!)… However, the markets like stability and that is what makes looking for the markets to revert to the mean so appealing. The further away from the mean price, the more likely it is to retrace.
Mean reversion strategies are used by algo traders, so there must be some success behind them, right?! 😉
Download the tool if you don’t have it, or have a play around on tradingview.com. Watch how in the past the market reverts to the mean frequently.
The Parabolic SAR, sometimes referred to just Parabolic or SAR, is a fantastic indicator that is again wildly misused.
Based on the market producing a parabola (a mathematical symmetry in the trend, think of the letter U shape), day traders would expect the market to reverse when price breaks this indicator’s line.
How does it work?
After the markets have been trending in one direction for a short period, the Parabolic SAR will start to plot where to expect the markets to reverse.
Once price breaks this line, day traders would look to take a trade following a breakout confirmation.
When traders have a position open, some use the Parabolic SAR as a trailing stop loss. This is good as it allows you to lock in profit the longer you are in the trade.
Why #5 For Parabolic SAR?
The Parabolic SAR is #5 on the best indicators for day trading because it can be used as a significant reversal indicator and a trailing stop loss monitor. Markets move fast in lower timeframes, so being able to identify when the market reverses & lock in profits is a necessity.
Load up the Parabolic SAR indicator on any platform, it should be on most, if not, all platforms.
Go through different time frames such as 1 Minute, 5-Minute, 15 Minute and have a look how the market reacted to the indicator – you should notice that most of the time, the market reversed after the price broke the Parabolic SAR indicator.
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The Donchian Channel indicator was originally made infamous after the Turtle Trader‘s experiment.
The indicator is similar to the Bollinger bands we discussed earlier.
The main theory behind the Donchian Channel is that it is used to detect breakouts from defined periods we set.
How does it work?
The most common setting is for 20 periods.
So the breakout occurs if the price trades higher than the higher or lower band.
This is set based on a trading month (20 trading days a month) though, so it would be best to experiment as per your liking/timeframe.
Once the price breaks above the price 20 candlesticks ago, this confirms that the price wants to go higher. The same is true if the price breaks below the price 20 candlesticks ago, this proves the price wants to go lower.
Not only is this a tool to discover potential breakouts but it is also used to tell how volatile an asset is.
The narrower the bands are the less volatile the asset is, likewise the wider the bands are the more volatile the asset is.
Why #4 for Donchian Channel?
Here at Alphaex Capital, we are firm believes in trading breakouts and mathematics.
Can you tell?
The Donchian Channel plots the previous highs and lows X periods ago to define when price wants to pursue a direction.
This is what makes the tool so useful, it allows you to focus on the price action and the market data, whilst automatically plotting the highs/lows.
As trading sentiment can change like the wind during the day, this helps protects day traders from whipsaws and allows them to take advantage of sharper market moves.
Without having to download anything, you can find this on Tradingview.com. Go have a play with the indicator and switch the settings from 20 periods to something that matches your timeframe. For example, if you trade 1 minute – try 60 periods which gives you the price high/low over the last hour. Or for 15 Minute you could try 8 periods to give you the high/low of the last two hours.
Fractals are a 5 candlestick pattern that is used to detect reversals in price, once the pattern has emerged the indicator prints an arrow depending on the fractal pattern, giving either a buy or sell signal.
Fractals are a great way to quickly denote when the price is breaking the structure or highlight key points in the market where you should have a view on either buying or selling the market – depending on the fractal pattern.
How does it work?
There are two types of fractals:
An upwards fractal – has at least five continuous bars and the highest high is in the middle of the 5 bars. E.g) h h Hh h h (h = high, Hh = Higher high).
A downwards fractal – has at least five continuous bars and the lowest low is in the middle of the 5 bars. E.g) l l Ll l l (l = low, Ll = Lower low).
You look to take a trade when price breaks above the fractal pattern for a buy, or below the fractal pattern for a sell. I.e) When the market creates a new Higher high or Lower low after the fractal.
Why #3 for Fractals?
Fractals can be awesome.
As you will have noticed, a lot of our indicators in the list require some form of breakout strategy. Fractals allow you to easily identify potential trading opportunities and you can effortlessly combine fractals with any of the other indicators in this list to provide valid trading signals every day.
You can quickly view fractals on tradingview or MT4 – see how they respond to the market yourself. Why not try combining the fractals indicator with another indicator for the list like the Ichimoku or Donchian Channel?
The Ichimoku Kinko Hyo indicator is one of my favourites.
It means equilibrium in Japanese, and it is an all-in-one indicator with a proven track record.
The beauty of this indicator is that it has 2 ways to trade it that any type of trader can use. These consist of:
Given its versatility – this is one of our best indicators for day trading
How does it work?
Kijun Sen (blue line): Also called a baseline, this is calculated by averaging the highest high and the lowest low for the last 26 periods.
Tenkan Sen (deep red line): This represents the average of the highest highs and the lowest low for the past nine periods.
Chikou Span (green line): This is called the lagging line. It is today’s closing price plotted 26 periods behind.
Senkou Span (red lines): The first Senkou line is plotted by averaging the Tenkan Sen and the Kijun Sen then printing it 26 periods ahead.
The second Senkou line is calculated by taking the average of the past 52 periods highest highs & the lowest lows and then this is plotted 26 periods ahead to give us a future price indicator.
This gives us our dynamic support and resistance levels.
The Senkou span acts as dynamic support and resistance levels.
If the price is trading above the Senkou span, then they act as 2x support levels.
If the price is trading below the Senkou span, then they act as 2x resistance levels.
The Kijun Sen (blue line) acts as an indicator of potential future price movement.
If the current price is trading higher than the Kijun Sen (blue line), it could continue to trade higher. If the price is below the Kijun Sen (blue line), it could keep trading lower.
The Tenkan Sen (red line) is an indicator of the markets current trend.
If the Tenkan Sen (red line) is rising or falling, this signals that the market is trading in a trend.
If the Tenkan Sen (red line) is plotted sideways this signals that the market is trading in a range.
Lastly, a buy signal is generated if the Chikou Span (green line) crosses the current price in the upwards direction. A sell signal is generated if the Chikou Span (green line) crosses the current price in the downwards direction
Why #2 for Ichimoku Kinko Hyo?
The reason why this is #2 instead of #1 in our rankings of best indicators for day trading is that it’s an all-in-one system. We believe you need to be a bit more fluid when it comes to trading and the Ichimoku will lock you into its methods, albeit they are excellent, so we went with something very powerful when combined with other indicators.
Plus, it’s a messy indicator which can sometimes hinder spotting price action developing.
Set up the Ichimoku on your platform and have a look at its performance over the past 12 months. Digest how it’s done with different asset pairs, specifically any JPY crosses and EUR crosses.
We’ve ranked 7 of the best indicators for day trading that we believe would not only be easy to learn and implement but help you find better trading opportunities each day.
All of the indicators are useful for different scenarios, so there is no need to single one out.
Which trading indicator are you going to try?
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