Congratulations on making it to the next level trading! We’re going to step things up now and get into trading indicators. These really give you move tools in reading charts and looking for better trade set-ups.
Each time you read one of our posts you add more and more tools to your trading toolbox.
“What’s a trading toolbox?” you ask.
Compare trading as cooking.
You don’t use a spatula to chop onions, right? Neither do you use measuring cups to boil milk! There are proper tools for each case.
Just like trading, some tools and indicators are to be used in a certain situation or environments. That’s why the more tools you have on you, the better you can adapt to the changing market environment.
Here are 5 indicators that will generate signals that can translate into a profitable bottom line over time:
Heard of this?
It’s one of the most used indicators by traders.
It smoothes out the price fluctuation to enable you to distinguish between the market noise and the trend reversal. It is represented by single line flows that indicates the average price over a certain period of time.
You can set different moving averages according to your preference.
For instance, if you are a long term trend trader, the popular choices are 200, 100 or 50-day moving average.
So how does it work?
The moving averages can be utilised in several ways. First, you can use them to look at the angle of the moving average.
Moving Averages In a Trend
Let’s say the average is moving horizontally for an extended period of time, we can say that the market is ranging. Likewise, if the average line is angled up, then it is on an uptrend.
Keep in mind, moving averages don’t predict, they show the performance of the price on average over a certain time. They also operate as support and resistance which you can understand more here.
Related Reading: How to Read Trading Chart
Moving Averages In Crossovers
The second way is the crossovers.
Here, you plot both 200 and a 50 day moving average on your chart.
When the fifty crosses a below the 200, you can consider it a buy signal. The same way occurs when it drops below the 200, consider it a signal to sell.
This is not limited to only those time frames. You can easily alter them to suit your trading strategy.
Be careful though: the price can be more volatile than the averages and you might get false signals that might be fatal to your trading.
Moving Averages as Support and Resistance
Lastly, you can use the moving averages as a support and resistance signal. This can prove effective especially if you are using a support and resistance trading strategy.
The Moving Average Convergence Divergence (MACD) as an oscillator indicator that fluctuates above and below zero. This tool is used to show moving averages indicating a new trend- both bullish and bearish. A perfect way to use trading indicators to inform future market direction.
And how can you use it to make money?
Well, there are a few ways you can use MACD to trade.
One way is to look on which side the lines are for a certain period of time. If they are above zero, you can count it as an uptrend if they are below, it’s a downtrend.
Count it as a potential buy if it is above zero and/or sell when it crosses below zero.
This can also be added with the signal line crossovers. The indicator has two lines, a fast line, and a slow line.
The Relative Strength Index (RSI) is another oscillator developed to help you evaluate the current market strength.
Consider it as an indicator to show if the price is overbought or oversold.
It easy to understand, when the price is above 70, consider it as overbought and when it is below 30, it is simply oversold.
If the market in on uptrend, the price will often go above 70 for a long period of time and if it’s on a downtrend it can go 30 and below for a sustained time as well.
How to trade with the RSI indicators…
You can use them as a buy signal if the price is oversold or undersold. How?
If it is a downtrend and the RSI is on an overbought, go for a short buy.
If you are looking at a long-term trend, you can consider it a buy signal if the RSI moves below 50 and then back.
Essentially, this is a pullback and it’s a good time to buy once a pullback has happened. It shows the trend is resuming.
On most occasions, the RSI doesn’t go below 30 if the market is on an uptrend unless there is reversal underway. The same happens it is on a downtrend; it usually doesn’t go above 70.
These signals shouldn’t be relied upon mostly since they don’t give timely signals for trend trader. Instead, they should be used to support your strategy and enable you to make a more informed decision when executing a trade. This is a great way on how to use trading indicators to add to your trading toolbox.
On balance volume indicator (OBV) is a valuable indicator that takes the market volume information and compiles it to a single line indicator. It measures the selling and buying pressure by compiling the up days and subtracting from the down days.
How it works…
Ideally, this is used to confirm the market trend whereby the rising trend is supposed to be accompanied by a rising OBV and the down price a falling OBV.
You can use this trading indicator to predict the markets next move.
For instance, if the OBV rises and the price is not, the market is likely to rise.
These are chart indicators developed to measure market volatility. They are comprised of two simple moving averages plotted at 2 standard deviations on each side of moving the average line.
Basically, these little tools indicate whether the market is loud or quite. When the market is quiet, they contract and when it’s loud they expand.
You can use them to trade on both trending and ranging markets.
Bollinger Band Bounce
In a ranging market, you can trade using the Bollinger bounce.
One thing to keep in mind here is that the price tends to return to the middle of the bands.
Think of it like mean regression. The price will naturally return to the average over time.
If the price hits at the top or the bottom of the band, then you can easily place a sell/buy order. It’s evident that the price will settle towards the middle of the band. You can also see on the example the need to use stop losses, as it occasionally pushes outside of the Bollinger Bands before a pullback inside.
The bounce will occur because the band acts as a dynamic support and resistance levels.
The bands get stronger as you go in a higher timeframe.
Bollinger Bands Squeeze
On the trending market, you can use the Bollinger squeeze.
It’s easy when the bands squeeze, it indicates that the breakout is about to happen. If the candles break out the top band, you are on an Uptrend, if it breaks the bottom, it’s a downtrend. A simple and repeatable way you can use trading indicators.
Using trading indicators
Now that you understand how to use trading indicators and how these work, you are ready to get down to work and make some money.
Better yet, you can combine them and have more informed decisions and overall make money. Be informed, indicators alone are no bulletproof strategy. Find your angle in the market and use them to confirm a decision when making a trade.