From beginner to seasoned pro – all traders are looking to get better at what they do – always looking for an edge. It’s our defining characteristic.
Improving your edge even a small amount can lead to significant gains in the long run.
When considering the best day trading indicators, it was pretty simple for me as I primarily only use two of them. Odds are you have never heard of the indicators we are about to discuss, but they can be extremely powerful when implemented along with your trading strategy.
Prior to jumping into the best day trading indicators, let’s take a look at what a trading indicator is and what you should consider prior to trying a new day trading indicator.
Day Trading Indicators
Day trading indicators are based on mathematical studies of historical price and/or volume data. Technical traders use this data to help predict future price movements.
It’s important to remember that trading deals in probabilities, not certainties. There is no “holy Grail” trading indicator that will predict future price movement 100% of the time.
Keep Trading Simple
Trading is as complicated as you want to make it. There is a belief that successful traders have found some super secret advantage that allows them to consistently make money.
Here are some cold hard truths about trading.
- A trader’s actual system plays a very small role in determine a trader’s success. Psychology and a trader’s decision-making process is ultimately what will determine their success or failure over the long run.
- Some of the best traders in the world have win percentages around 60%. The perfect example that there is no Holy Grail that wins all the time.
- The simpler the trading system which requires less user input usually will work best. The more variable you include will require more decision making on your part, which generally speaking a recipe for failure, especially for newer traders.
Using too many trading indicators can cause indecision making it difficult to pull the trigger when it’s time to take a trade. Furthermore, a lot of indicators can be redundant.
Keeping things simple and not over complicating your charts will most likely lead to more confidence and success when trading.
Now that you understand that there is no perfect indicator and the simplicity usually works best, lets take a look at the trading indicators that have been the most useful through out my trading career.
The markets are driven by human emotions, primarily fear and greed. Market sentiment is the combined feelings and beliefs of a crowd (investors) towards a particular stock, currency, or any other financial security.
Wouldn’t it make sense to try and capture these emotions into a trading indicator that would give an overall view of the market? Well now you can…
Market Breadth Trading Indicators
Market breadth indicators tend to be used primarily when analyzing stock indexes or individual stocks. They measure the internal strength or weakness of a market by analyzing the net action of the component stocks with a particular index.
There are many market breadth indicators available. Today we will examine two of the most popular including the NYSE Tick Index and the Advance-Decline Market Internals.
NYSE Tick Index
($TICK on ThinkorSwim Platform)
What is a ‘Tick’
A tick, similar to a pip in Forex, is the minimum movement of a price of a security. Since 2001, the minimum tick size for stocks trading above $1 is 1 cent.
There are two types of ticks, an uptick and a downtick.
A security is on an uptick when the last price traded occurred at a higher price than the previous price. For example, Google’s last price traded was $750.25 and the previous trade occurred at $750.20. Google would be on an uptick.
A security is on a downtick when the last price traded occurred at a lower price than the previous price. For example, Google’s last price traded was $751.50 and the previous trade occurred at $751.65. Google would now be on a downtick.
A Tick Index represents the number of stocks ticking up versus the number of stocks ticking down in a particular market such as the New York Stock Exchange.
For example, if the NYSE Tick reads +350, a bullish signal, then 350 more stocks are ticking up then are ticking down. If the NYSE Tick were to read -400, a bearish signal, then 400 more stocks would be ticking down then are ticking up.
When using a tick index you’re looking for extremes in the index to help determine a trending versus chopping market.
Over time the definition of an extreme or powerful reading has changed due to the increase in listings at the exchanges. As there are more stocks traded at an exchange, the range of a tick index will continue to expand.
In my own trading I consider a reading above 300 to be a bullish signal and a reading below -300 to be a bearish signal.
A tick index is an extremely short-term indicator of overall market sentiment. Used alone, the tick index is probably not a very effective trading system. However, when combined with your current trading strategy, a Tick Index can dramatically improve your entry points.
How to Use a Tick Index
There are two schools of thoughts when using a tick index depending on if you’re a trend trader or countertrend trader.
Trend traders look for a reading that signals the start or continuation of a trend.
Being a trend trader myself, I look for a sustained tick count above 300 when entering a long position and below -300 when entering a short position. A sustained tick count is when the reading holds above 300 or below -300 for 3-5 seconds.
Counter trend traders will also use the Tick Index to try and determine a reversal point in the market. Typically countertrend traders will look for a reading above 800 or below -800 on the NYSE Tick to signaling an extreme and a potential reversal.
The belief is that at the end of strong trends there is a blow off, or a final “puke” as I like to call it, of weak handed traders blowing out of their positions or getting in late to chase a move.
While the Tick Index is primarily used when trading stocks or index futures, some traders may find other uses when studying correlations between a given market and stocks.
Advance-Decline Line (A/D Line)
($ADVN-$DECN on ThinkorSwim Platform)
The A/D Line is a very broad indicator as the calculation takes into account over 2,500 stocks. It is a cumulative calculation that plots the change in value of the number of advancing stocks minus declining stocks.
A reading of 500 would indicate 500 more stocks advancing than declining stocks (Bullish). (Bullish) A reading of -400 would indicate 400 more stocks declining than advancing (Bearish).
Important A/D Line Levels: 750, 0, -750
Having traded using the A/D Line for over a decade, I have noticed the pattern of support and resistance levels forming at 750, 0, and -750.
On the chart below you can see how these three areas had formed key reversal points.
How to use the A/D Line
When looking to enter a setup you can use the A/D line as an additional rule to take a trade.
When the A/D line is advancing you want to look for long setups and if the A/D line is declining you want to look for short setups. Furthermore, if the A/D line is approaching a Support or Resistance level (750, 0, -750) you may want to hold off on the trade and look for further confirmation, especially if it’s midday.
No Indicator the Best Indicator?
Far too often I see traders messy charts and dozens of trading indicators. Keeping things as simple as possible will benefit you over the long run.
I know a lot of successful day traders who simply use price action to determine entries and exits.
Price action traders read the market and make all of their decision based off a securities actual price movement, rather than relying on lagging trading indicators to determine entries and exits.
So-called traders are often said to trade off of “Naked Charts” as they lack the use of any trading indicators.
As a price action trader myself I look at the following when taking a trade:
- Current price structural patterns
- Key support and resistance levels
- Momentum in the market determined by the the A/D line, NYSE tick, and overall price structure.
Keeping things simple, especially as a new trader, can be very beneficial. I would suggest you don’t use more than two indicators when developing your system.
So there you have it! That is a short dive into the best day trading indicators that will help boost your profits. Thanks for reading, and I really hope you enjoyed it. Take what you like and try implementing it into your own trading system, then let me know how it goes!
Adam is the founder of Jumpstart Trading. He began his trading career in 2003 as a proprietary equity trader for GPC, which at the time was the second largest prop firm in the United States. While with the firm he achieved top 10 performances and became one of the youngest trainers for the firm. In 2008 he moved on to trade his own capital while developing multiple trading strategies and algorithms. He has quickly become recognized as one of the elite order flow traders in the industry. Today Adam primarily focuses on U.S. Index futures.