What Indicators Should You Follow When Day Trading?
May 13, 2020 (Investorideas.com Newswire) Day trading continues to be a popular approach in 2020, given the increased market volatility. At the same time, combined with high uncertainty, traders are forced to look for short-term opportunities, until the future will be more predictable. Beginners are generally fearful they won't manage to trade this way because they read a lot of false claims about what complex skills they need to do it efficiently.
Overcomplicating the trading process in the early stages is not suitable, as long as simple indicators can do the work. For new traders, after consulting a beginner's guide to forex, the following indicators should be studied.
Moving averages
With the help of a moving average (or a mix of 2-3 different MA), a retail trader can understand the price action context. When the market is trading above a longer-term average, that equals a bullish environment and a bearish case in the opposite scenario. At the same time, intra-day breakouts of moving averages could suggest a change in the market structure had occurred.
In terms of which moving averages could be used, traders have many options available. Fast-moving averages like the 20 EMA or the 21 EMA had statistically proven to produce price reactions. For traders wanting to use long-term moving averages, 50 SMA, 100 SMA, or the 200 SMA are extremely popular. Why should a trader use them? Simply because prices react often when touching them.
Momentum indicators
Day traders aim to spot the dominant market direction and then look for opportunities. Momentum indicators represent another category that can help us understand the short-term performance of any given asset. Utilized to get a better understanding of the speed or rate at which the price of a security changes, indicators like Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), or Average Directional Index (ASX) are all worth keeping in mind.
The good news is that all of them work efficiently on any liquid asset (indices, ETFs on top of forex). To generate returns, the price must move impulsively in either direction (bullish or bearish). Stable markets or wild volatility periods are not appropriate. However, when we have a directional bias, momentum indicators can provide high accuracy trading opportunities.
Fibonacci levels
Since markets can't move in a straight line, traders wait for retracements to ride the trend. Finding support/resistance areas where the market will resume on the dominant direction is the most challenging task in this case. Still, using Fibonacci levels is very common among traders, with a highlight on the 50% or 62.8% Fib levels. Based on strategy testing, it turns out these two had proven to work well over time.
It's also important to note that using Fibonacci levels alone could result in a higher rate of inaccurate trading signals. That's why traders use these levels in combination with other technical indicators. When Fib levels overlap with moving averages or other critical support/resistance areas, the efficiency increases. The main reason for is a greater accumulation of market orders around a small area, which makes the price to start trending in the dominant direction again. As long as big market players pay attention to these levels, there's no reason why retail traders should not do the same.
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