The most important stock market indicators
If you do not get enough training, day trading in stocks will be very risky for you. But if you can anticipate future market trends, you will surely make profits. Knowing the signs will help Technical Analysis in doing so.
“Technical analysis is a skill that gets better with experience and study. Always be a student and strive to learn constantly.” – John Murphy
It was a long time ago when stock trading was just a simple game of buying and selling. It is completely different now. Technical analysis is the art and science of predicting future prices by studying past price movements providing investors with new technical analysis clues.
Here are some of the most commonly used technical analysis indicators in stock trading:
1- Trading Volume Index (OBV)
Trading volume indicator It is a technical analysis indicator used to measure the positive and negative flow of volume in a security over time. This indicator was developed by Joseph Granville. According to this indicator, when the volume increases sharply without much change in the share price, it means that the price will rise sharply in the end, and when the volume decreases sharply without much change in the share price, the price will fall sharply in the end.
There are three rules that are implemented when calculating the OBV indicator:
1. If today’s closing price is higher than yesterday’s closing price
Current Volume Index = Previous Volume Index + Today’s Trading Volume
2. If today’s closing price is lower than yesterday’s closing price
Current Volume Index = Previous Volume Index – Today’s Trading Volume
3. If today’s closing price is equal to yesterday’s closing price
Current Volume Index = Previous Volume Index
According to Gravelli’s theory, a rise in the volume index reflects positive volume pressure that can lead to higher prices. A decrease in the volume indicator reflects negative volume pressure that could lead to lower prices. The volume indicator often moves before prices move. One can expect prices to rise if the volume indicator rises at times when prices are either flat or heading down. Similarly, one can expect prices to fall if the volume indicator decreases at times when prices are either flat or moving upward.
2- Accumulation / Distribution line (A/D line)
The Accumulation and Distribution line is among the technical analysis indicators most used to determine the flow of money in and out of a security.
It was Mark Chaykin who developed this indicator with the aim of measuring the cumulative flow of funds into and out of a security. This indicator was previously called the cumulative money flow line.
This indicator attempts to measure supply and demand by determining whether investors are buying (when accumulating) or selling (when distributing) a particular stock.
How the indicator works:
This indicator helps show how supply and demand factors affect the price. The Accumulation/Distribution indicator can move in the same direction as the price or it may be in the opposite direction.
If the price of a security is in a downtrend while the accumulation/distribution line is in an uptrend, this indicates that there may be buying pressure and prices may reverse. Similarly, if the price of a security is in an uptrend while the Accumulation/Distribution line is in a downtrend, this means that the indicator indicates that there may be selling pressure and prices may reverse.
3- Average Directional Index (ADX)
The Average Directional Index (ADX) is a trend indicator used to measure the strength and momentum of a trend. An advantage of trading in the direction of the trend is that it reduces risk and also increases profit potential.
The Average Directional Index (ADX) is used to assess the timing of a strong price trend. ADX indicator calculations are based on a moving average of a price range over a period of time. The default setting is 14 columns.
Trend strength according to the average trend indicator
The values provided by this indicator are important values for distinguishing between trading situations in which there is a clear trend and those in which there is no clear trend. An average trend indicator reading above 25 indicates that the trend is strong enough to apply trend trading strategies. Similarly, if the ADX indicator reads less than 25 then this means avoiding trend trading strategies.
4- Aroon Indicator
The Aroon Indicator is a technical analysis indicator used to measure whether or not a security is in a specific direction. It is used to determine the timing when trends are likely to change direction. This indicator measures the time it takes for the price to reach the highest or lowest price point over a certain period of time.
The indicator consists of the Aroon up line and the Aroon down line. The rising Aroon line measures the strength of an uptrend while the downward Aroon line measures the strength of a downtrend.
There are three stages to identifying a bullish trend signal on the Aroon indicator:
The first stage: the intersection of the lines of the Aroon indicator. The signal is bullish when the Aroon-Up line moves above the Aroon-Down line, which indicates that the new high has become more recent than the new low.
The second stage: the intersection of Aroon lines above or below the 50 level.
The third stage: one of the lines reaches the 100 level. The Aroon indicator reaches the 100 level and remains at the lowest levels.
And if you reverse these three phases you will be able to spot the downtrend signal on the Aroon indicator
5- MACD indicator
The MACD indicator is a trend-following and momentum indicator that shows the relationship between two moving averages of a security’s price.
How the indicator works
When the MACD falls below the signal line, this is a bearish signal and when the MACD rises above the signal line, the indicator gives a bullish signal.
The trend shift is more reliable when it matches the current trend. If the MACD crosses its signal line after a short correction, it is considered a bullish confirmation.
6- Relative Strength Index (RSI)
The RSI is a momentum indicator that measures the magnitude of current price changes to determine whether a stock is overvalued or undervalued. It was Willis Wilder who originally developed this indicator.
How the indicator works
The RSI is overbought when it is at levels above 70 and oversold when it is at levels below 30.
1. Buy when the indicator moves from below to above the oversold line.
2. Sell when the indicator moves from above to below the overbought line.
Note here that the direction of the crossover is important in this indicator; As the indicator first needs to cross overbought/oversold lines and then cross them again.
7- Stochastic indicator
The Stochastic is an indicator that measures the current price in relation to a price range over a number of time periods. It was George Lim who developed this indicator. This indicator is used to compare the closing prices of securities during a specific period. The 14-period stochastic is the most popular indicator.
How the indicator works:
This pointer is always moving between zero and one hundred. A reading above 80 is generally considered overbought and a reading below 20 is considered an oversold area.
1. The trader should take profits from long positions and avoid entering new long positions in the overbought area.
2. The trader should reap his profits from selling deals and avoid entering new selling deals in the oversold area.
8- Fibonacci retracement
Fibonacci retracement marks support and resistance areas. This indicator uses horizontal lines to indicate support and resistance areas at key Fibonacci levels before the trend continues in the original direction.
These levels are identified by drawing a trend line between the highest price and the lowest price, and dividing the vertical distance by the main Fibonacci ratios 23.6, 38.2, 50, 61.8, and 100.
9- Parabolic SAR
The Parabolic SAR indicator is one of the best technical analysis indicators that are used to determine the direction of the price of a security and also when the price direction changes. It was developed by Wells Wilder.
The Parabolic SAR appears on a security’s chart as a series of dots above or below the price. A small pip is placed above the price in case of a downtrend. On the other hand, the point is placed below the price in case of an uptrend.
Day trading refers to the buying and selling of stocks on the same day for financial gain. In other words, individuals arrange their trades before the market closes to make a profit. However, compared to equity investments, this carries more risks due to the higher volatility. Hence, one must implement a wise intraday trading strategy to achieve his financial goals.
Best stock market trading strategies
Here are some The best trading strategies Daily that can be used to make profits in the stock market
As its name suggests, this strategy relies on making the most of the momentum in the market. This involves tracking the correct stock movement before a major change in market direction is achieved. Based on this change, traders buy or sell securities. The fact is that choosing stocks depends on the latest news, announcements of acquisitions, quarterly earnings, and other important factors.
Hence, it is important for the traders to study such news regarding the stocks in the list they select at first, and then they can place buy or sell orders accordingly. Since stock prices are not exposed to fluctuations due to various external factors, traders during the trading day have to make quick decisions to achieve the desired profits. How long traders hold the shares depends on the market momentum.
when it comes to buying and selling Money bills On the same day, timing is undoubtedly one of the most important factors. This day trading strategy involves noticing which stocks have broken out of their usual trading range.
Alternatively, the trader can identify stocks that are about to trade in a new price range. In other words, traders have to identify the price points at which stock prices go up or down. If stock prices rise above their starting point, intraday traders can enter long and long positions on the stock.
The basic idea behind this strategy is that when stock prices cross the price threshold, the trend will continue, and volatility will simultaneously increase.
This trading strategy is associated with high risks, as it relies on making investment decisions against the market trend, based on its own analysis. As compared to the other methods, this day trading strategy is more challenging, because intraday traders need extensive knowledge regarding the market. Moreover, defining the exact entry and exit points can also be quite a challenge.
A scalping strategy involves making financial gains from small price changes. This method is commonly used by intraday traders when buying and selling commodities. In addition, this technique is usually used by traders who prefer to operate in price volatility.
In this strategy, traders should keep in mind that fundamental or technical analysis in its entirety is not very relevant in this case. This price movement is of the greatest importance in the case of the scalping strategy. When choosing stocks, individuals who choose this day trading strategy should ensure that they choose stocks that are volatile and highly liquid. They also have to make sure to place a stop loss order for all orders.
Moving average crossover strategy
When the prices of a stock or any other financial instrument moves above/below the moving average, it serves as an indication of a change in momentum.
When stock prices rise above the moving average, it is called an uptrend. When stock prices are below the moving average, it is referred to as a downtrend. In the event of an upward trend, experts recommend entering long positions or buying stocks. However, when there is a downtrend, traders enter short positions.
A gap strategy involves finding stocks that have no volume before entering the market. The opening price of these stocks is a gap with respect to yesterday’s closing price. When a stock price opens at a higher level compared to the previous day’s closing price, it is known as a bullish price gap. However, if the opposite happens, it is known as a bearish gap. Intraday traders who choose this strategy identify these stocks and go long in them thinking that the gap will close before closing.
Basic rules when using day trading strategies
Here are some basic rules of day trading:
- Plan your trading strategy and stick to it
- Select the ideal stocks for day trading
- Trade with money you can afford and the loss will not affect your financial situation
- Thoroughly research and choose highly liquid stocks
- Track your financial gains and losses
- Make sure all open trades are closed
When it comes to day trading, there are many ways one can choose to profit. But in any case, it is necessary to fully understand the day trading strategy before implementing it in order to achieve the desired profits from it.
Moreover, traders have to make sure they keep up with the latest stock market news and follow the market trend to make the right decisions at the right time.