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Chapter 9.5:Intraday Trading Indicators and Technique

-   Intraday trading decisions are usually made based on price movements. But not all traders may be equally adept at reading and interpreting these movements. This is why many intraday traders depend on some indicators to help them arrive at the right decisions.

-   That said, remember that intraday trading requires precise timing of sell/ buy decisions to be profitable. As such, using too many indicators can be counter-productive too as they can slow down your decision-making. Plus, many indicators present the same information with a slight variation. This makes some of the indicators redundant.

-   Broadly speaking, intraday trading indicators come in 4 flavours. Experts recommend following one indicator of each type for most decision-making. However, you can follow more indicators as per your convenience. These flavours are:

  1. 1. Oscillators: This is a group of indicators that move up and down between an upper and lower bound. Examples of this type of indicator include: Relative Strength Indicator (RSI), Commodity Channel Index (CCI), Stochastics, and Moving Averages Convergence Divergence (MACD).

  2. 2. Volume:: This flavour of indicators mainly rely on trade volumes. They also combine this volume data with price data. This helps indicate the strength of a trend. Such indicators are Chaikin Money Flow and On Balance Volume among others.

  3. 3. Overlays:: These are indicators that are overlaid directly on the price movement and are not shown separately. These serve a variety of purpose and some traders may use multiple overlays as well. Popular examples of this type of indicators include: Bollinger Bands, Parabolic SAR, Keltner Channels, Moving Averages, and Fibonacci Extensions and Retracements.

  4. 4. Breadth indicators:These indicators show how the stock market at large is behaving. These do not directly show how a stock being monitored behaves. These include Trin, Ticks, Tiki and the Advance-Decline Line.

Now that you have a basic understanding of the broad types of indicators, here’s a list of indicators that are likely to be useful for a beginner intraday trader.

  1. 1. Moving Average: A Moving Average (MA) is a line showing the average closing price of a stock for a given period. As the price movements have a volatility, it may not always be clear if the price movement has any long-term trend. MA isolates this trend by showing the average closing price over a period. A short-term average higher than the long-term average usually indicates that the market is bullish about the stock under consideration.

  2. 2. Bollinger Band: This is a band that shows how the price deviates on average from the moving average over a period. Traders believe that the stock price is likely to trade within this band. So if a stock is trading under the Bollinger band, traders expect it to rise and vice versa.

  3. 3. Momentum Oscillator: This indicator shows how strong the demand for a share is at a given price point. For example, if the share price is rising and approaching the weekly high, but the momentum oscillator is falling, a trader infers this to indicate that the price will soon turn as the demand for the share is falling. On the other hand, a rising momentum oscillator shows that the trend is strong and is likely to continue to hold.

  4. 4. Relative Strength Indicator: RSI is one of the most popular oscillators. It tracks the last 14 periods by default and shows the strength of a price. It does so using an index that ranges between 0 and 100. If the RSI is at 70 or above, it could indicate that market is overbought. This means a price fall or a correction is due. On the other hand, if the RBI is below 30, it could indicate that the market is oversold. Traders then expect the price to start rising soon.

What next?

Intraday traders usually use trading indicators along with their time analysis to pick stocks and place orders. You can choose to do so and start trading now. If you have any more questions, head to our FAQ section for answers to commonly asked questions.
In fact, one of the most commonly asked questions is how intraday trade differs from delivery trade. We’ll look at that next.

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