Intraday trading can be tricky for beginners. Traders need to keep an eye on several different variables to get an edge over others. These variables include chart patterns, technical indicators, open interest, market news, etc. In this article, we’ll focus on the best indicators for intraday trading. These indicators would help you to maintain a constantly good success rate and risk-reward ratio.
The 7 Best Indicators for Intraday Trading
There are 100+ technical indicators defined in classic technical analysis, but not all of them would be suited for intraday trading. We did analyze each of these indicators and filtered the ones which are best suited for day trading.
For example, indicators like “RSI (Relative Strength Index)” may work wonders for positional trading but may not carry much relevance in day trading.
Check out the below list which contains the 7 best indicators for intraday trading:
VWAP (Volume Weighted Average Price)
VWAP or Volume weighted average price is an indispensable tool for intraday traders to forecast the price movement of stocks. As the name suggests, VWAP is the weighted average of the stock price over a specified time period. The stock price is weighted based on the volume for that specified price candle.
It helps in Buying low and Selling High. If the price is below VWAP, it is considered undervalued, while a price above VWAP is considered overvalued. Crossing of prices above/below the VWAP line in the chart indicates momentum shift or change of trend.
VWAP serves as a reference point for prices for one day. As such, it is best suited for intraday analysis. Chartists can compare current prices with the VWAP values to determine the intraday trend. VWAP indicator can be also used as a dynamic support/resistance line during the sideways market.
Also Read: How to pick stocks for Intraday Trading?
EMA (Exponential Moving Average)
Moving averages are probably the most popular technical indicators used by traders across the globe. There are many different types of moving averages and among them, exponential moving average (EMA) is what we suggest for intraday trading.
Moving averages represent the average price of the stock for a predefined lookback period. In the case of EMA, all the price points are not given equal weightage while calculating the average, the nearest ones are given more weight than the far ones.
The best intraday trading strategy based on EMA is to look at crossovers. When a short period EMA crosses above the long period EMA take a BUY position, and when a short period EMA crosses below the long period EMA take a SELL position. The ideal values of short and long periods are 5 and 20 respectively.
See below chart example with BUY and SELL signals based on EMA indicator on a 5-minute chart:
Trading based on moving averages can be extremely profitable during a trending market but may produce whipsaws during a sideways market.
Supertrend is a popular trend-following indicator that works particularly well in the Intraday timeframe. It is also a trend-following indicator known for its preciseness and accuracy.
Supertrend works well for all the instruments i.e. equities, commodities, and Forex. It is calculated based on the Average True range (ATR) and a multiplier value. ATR measures the degree of volatility of the market.
A buy signal is generated when the Supertrend indicator closes above the price and a sell signal is generated when it closes below the closing price.
Trading based on supertrend alone can improve your profitability multifold. Especially for volatile liquid instruments the backtest results based on supertrend has been impressive
ADX (Average Directional Index)
We strongly believe that “trend” is the best friend of every intraday trader and the ADX indicator aids in determining the strength of the trend.
ADX is a non-directional trend strength indicator. Its values oscillate between 0 to 100, higher the value higher is the strength of the trend. The default look-back period of ADX is 14 periods, but it may vary depending on the relative volatility of stock or index. It is often used in conjunction with two other indicators, +DI and -DI which determine the direction of the trend.
ADX value below 25 indicates a very week trend while a value above 75 indicates a very strong trend. ADX is generally not used alone, rather it is used along with other trend-following indicators like EMA or Supertrend to filter the false signals.
Also Read: Why Open Interest matters in Trading?
OBV (On Balance Volume)
On Balance Volume (OBV) is a very popular momentum indicator that tracks the absolute volume change to speculate price movement. It’s a mass belief that volume drives price due to aggressive trades from institutional investors. On Balance Volume indicator essentially tracks this smart money flow into the market and signals future price direction.
OBV can be interpreted in the following ways:
- If a change in OBV value is relatively higher than a change in price for a given time period, then there may be a sharp upside or downside in the price in near future.
- OBV Divergences can be quite handy and reliable too. Bullish divergence is formed when OBV forms a higher high and higher low, while price forms lower low. Similarly, Bearish divergence is formed when OBV forms lower high and lower low while price forms higher high.
OBV may not be used independently on intraday charts, but it gives vital information in conjunction with other indicators.
Donchian Channel is a powerful indicator trend following indicator that works in both Intraday and Daily timeframe. It is derived by calculating Highest High and Lowest Low for a pre-defined period.
Any breakout of the Donchian channel upper or lower band is considered as the starting of a new trend. The Donchian channel is also useful for studying the volatility of the price. If the price is stable Donchian channel will be relatively narrow. If the price fluctuates often the Donchian channel will be wider.
Below is an example 5 minute chart with Donchian channel superimposed into it. There is an additional Donchian middle band in the chart which is formed by taking an average of upper and lower bands:
Check out a profitable intraday trading strategy based on the Donchian channel at this link
CPR (Central Pivot Range)
CPR is a versatile technical indicator used for intraday trading. It is composed of 3 levels – a central pivot point (pivot), top central level (TC), and bottom central level (BC). The previous day’s high, low, and close prices are used to calculate the CPR levels for the current day. And these levels remain constant throughout the day.
Any breakout above or below the TC and BC lines indicates a high probability that the movement will continue. And if the breakout candle has a higher volume than the preceding candles, then it gives an extra confirmation.
CPR lines can also act as support and resistance. When used judiciously, it can help you decide your stop loss level. Any of the 3 CPR lines can be used for this purpose.
We found the CPR indicator to be highly accurate in the intraday timeframe. It’s recommended to use it in a 5-minute chart for high beta stocks or indices.
If you trade based on CPR breakout with volume confirmation, the success rate can be as high as 70%.
Learn everything about CPR from this link.
Those were the 7 best indicators for intraday trading that works for all the financial instruments across all markets. We would recommend to start looking at these one at a time. Don’t wait for confirmation from all the indicators to initiate a trade, also don’t rely on just one indicator while designing your systems.
As always, let us know in the comments section if you have any questions.