A lot of people have made life-changing sums of money through trading, but as many as 90% of traders actually lose money.
This is usually because people go in without having a proper understanding of what they’re doing. Trading isn’t based on luck, it’s about knowing how the markets work and what you should be doing. Skilled traders use various trading indicators to make decisions, and this helps them make profits.
In this guide, we’ll cover some of the best trading indicators that you need to know if you want to be a successful trader. Keep reading for more.
1. Moving Average
MAs (Moving averages) are the most popular indicators that traders use. Understanding these is essential as they form the foundation of some other key indicators such as MACD and Bollinger Bands.
There are a few trading strategies that make use of moving averages, with the most popular being trend trading. This involves adding a moving average to a chart you’re looking at. You need to hold onto a trade as long as the price stays above or below this line (depending on the trade you’re making).
You should sell based on the term you’re using. For short-term support, people typically use periods of 5, 10, 20, and 50 days. With long-term support, periods of 100, 200, and 500 days are more common.
2. MACD
MACD (Moving Average Convergence Divergence) is don’t by using two moving averages. This will typically be a fast MA of 12 with a slow MA of 26, though you might want to change this. MACD is often used in reversals trading and trend following.
In reversals, the two MAs will make a crossover below the neutral line, and this is the signal. If both lines keep rising while the MACD line is above the signal line, it’s considered bullish. Once they cross the neutral line, they need to remain there for a bullish trend.
3. RSI
RSI (Relative Strength Index) is a very common choice in the financial market. It determines the momentum of various assets such as currencies, stocks, and ETFs (exchange-traded funds).
Most people use the RSI to identify oversold and overbought levels. An asset is oversold if the price has dropped a large amount over time. It’s overbought if the price has increased over a long period.
You can use the RSI to follow trends for buy and sell signals. Buy signals come when the indicator keeps moving up, and sell signals occur when the indicator keeps moving down.
4. Bollinger Bands
Bollinger Bands involve using MAs with standard deviation. The movement of the MA over a certain period is shown by the middle line of the indicator.
The upper and lower lines show the standard deviations. In most cases, the standard deviation is 2 (with 0 offset) and the MA is typically 20.
When the price remains between the upper and middle lines, it indicated an uptrend. This is when it’s usually best to buy.
If the price is between the middle and lower lines, this is a downtrend. This is a key sell indicator.
5. Ichimoku Kinko Hyo
This is considered by experienced traders to be one of the easiest-to-use and most accurate indicators available. Despite that, it’s also thought of as one of the scariest.
Several lines are used for it, including the lagging span, baseline, conversion, and lead 1 and 2. Traders use these in different ways for their trades.
For example, some use it to identify reversals shown by the baselines making a crossover. Others use it for trend following.
The Ichimoku cloud can be used to determine bullish trends. This occurs when the price remains above the Ichimoku cloud. Another way to detect a bullish trend is with the lagging line when the price sits above it.
6. Stochastic Oscillator
This is another indicator that traders use to find oversold and overbought levels on the stock market. It uses two lines known as %K and %D.Additionally, it has an upper and lower band of 80 and 20 respectively.
Typically, if the two lines make a crossover below the lower band, this is a buy signal. A sell signal occurs when the lines make a crossover above the upper band.
After a crossover happens, the trend will remain bullish as long as both lines keep moving upwards, and bearish if they continue to move downwards.
7. ADX
ADX (Average Directional Moving Average) is often used for trend trading. Most traders use it to measure the strength of trends. The indicator appears similar to other oscillators like RSI and momentum indicators and ranges from 0 to 100.
A bullish trend generally remains as long as the ADX is rising (and vice versa). Be wary when using this indicator, however, as it’s often criticized. Many experienced traders highlight that it often provides incorrect signals, which is something you want to avoid with day trading.
If you’re trying to become a skilled day trader, you may want to keep your risk to a minimum when you first get started. As such, this probably isn’t the best indicator to use when you’re new to trading. My Investing Club can help you get started as a day trader.
8. ADL
Advance-Decline Line is mostly used to trade indices. This includes things like the S&P 500 and the Dow Jones. It involves looking at how many stocks are advancing and falling in a session.
When more shares are advancing than falling. the indicator will continue to rise. If more shares are falling, then the indicator will also fall.
Making Use of Technical Analysis and the Best Trading Indicators
Everyone would love to be able to trade successfully, but it isn’t easy. If you want to achieve your trading goals, you need to put in the work. The better you understand the best trading indicators and how the market works, the greater chance you’ll have of success.
While the thought of trading may be exciting, don’t just rush in. Start small, and only trade money that you can afford to lose. As your knowledge and confidence grow, you can start being more adventurous with your trades.
For more finance articles, check out some of our other blog posts.
