3 Practical Day Trading Indicators

With the tons of trading indicators out there, it is a Herculean task to go through them one by one. Hence, many of our readers have asked for recommendations of day trading indicators.

(Yes, you ask. And we deliver, if we can. Tell us what you want here.)

To get you started with day trading, we suggest these three trading indicators.

1. Donchian Channel
2. Moving Average
3. Stochastic Oscillator

They are simple, easy to understand, and useful for day trading. No, they are not perfect. But they form a nice package to start with.

1. Donchian Channel (Blue)

Richard Donchian, the pioneer of trend following, invented the Donchian Channel. The channel plots the highest high and lowest low of a specified time period. An average of the two values is also calculated and plotted as the mid-line.

Donchian Channel shows you where the market is now, compared to its past, in a direct and visual way.

The Donchian Channel is useful for day trading as you can use it to keep on eye on the larger time frame. Use a 100-period Donchian Channel to keep you with the longer term trend.

2. Moving Average (Orange)

A x-period moving average is the average of the past x number of  price closes. As new price bars close, the moving average will move along, dropping the oldest close and including the newest close in its calculation.

The direction of the moving average highlights price trend, and the space between price and the moving average highlights momentum. This simple indicator packs a punch if you know how to use it.

While there are dozens of moving average flavors, start with the simple or exponential moving average with a 20-period setting for day trading.

3. Stochastic Oscillator (Lower Panel)

The stochastic oscillator is a popular day trading indicator.

Its working logic is like that of Donchian Channel, in the sense that it measures the current market position relative to the market’s past trading range. However, it assumes that the market is in a trading range and turns that measurement into an oscillator that moves between 0 to 100.

It is useful for finding day trade entries as it is sensitive and responsive. (Use %K-5, %D-3, Smooth-3 for your settings.)

For a multiple time-frame day trading method using stochastic, take a look at Kane’s %K Hooks strategy.

Day Trading Indicators – A word of caution

You get three indicators. Now it’s time for three warnings against them.

1. Indicators are not perfect, understand when and how to use them.
2. Don’t neglect price action when trading with indicators. Consider using price action patterns to improve your analysis. (Like this simple failure pattern, or the Hikkake pattern.)
3. Do not overwhelm yourself with indicators. Consider the value of every single indicator you add to your chart. Does it add value? Remember to trade simply.

Even with powerful indicators, the most successful traders never forget to analyse price itself. Learn the essentials from our price action trading guide.