Day trading is very challenging but can be extremely rewarding. This article outlines the 3 best indicators the author believes are most suitable to make you a profitable day trader. If you’re ready to open an account to start day trading, check out our list of the best Forex / CFD brokers for scalpers / day traders.
To begin with, the first thing that I should probably point out is that there is a certain amount of personal bias in trying to figure out the “best” Forex indicators. This is done through the prism of experience more than anything else, and it should be noted that trading is a very personal thing, however, I am more than willing to share what I have found to be the three best Forex indicators for day trading, including what I would consider to be the best non-repainting Forex indicator for day trading.
Repainting vs. Non-Repainting Indicators
In order to understand this article, you need to understand the concepts attached to it. When somebody refers to an indicator as being “repainting” or “non-repainting”, it simply means whether or not the calculation changes over time. This typically involves taking a calculation that looks back and calculating some type of average or oscillation in order to plot where the market may or may not be going. The biggest problem with a repainting indicator is that it obviously gets skewed over time. For example, if you are using an indicator that tracks the last twenty candles, over time that indicator will be influenced by new candlesticks coming into the market. It does not necessarily look back at major points in history, nor does it look ahead at what behavior might be in the market.
In fact, one of the biggest problems that repainting indicators have is that they always back test well, at least at first glance. After all, if the indicator corrects itself to fit the marketplace, then it looks better the longer it runs. However, in the heat of the moment it does not necessarily mean that the indicator gave you all of the information you needed. As with any indicator, you should never look at a signal from one specific indicator as a reason to take a trade. It is simply confirmation of price action that you are hoping to achieve.
I know this sounds a little passé, but one of the most effective indicators is the humble moving average. After all, the EMA (exponential moving average) is something that is followed by a lot of other traders so it lends a certain amount of credence to its use due to the fact that so many other people will be watching them. However, it goes a little bit beyond that as it also gives you an idea as to what the trend may be for the time frame being traded.
For example, you can use an exponential moving average to determine the longer-term trend, but you can also wait until your favorite shorter-term exponential moving average is lined up with that bigger one. As an example, you can use the 200-day EMA to determine the longer-term trend and wait for the 9 EMA to turn in your favor on shorter-term charts giving you a trading signal, as shown below. Notice how as soon as the 9 EMA dropped, it began a bigger trend for the rest of the day on the five-minute chart. This also happens to coincide with the downtrend on the daily chart. This can keep you in the same direction as “big money”, and perhaps even more importantly “big momentum.”
Relative Strength Index
The RSI, or “Relative Strength Index”, is an indicator that measures exactly what it says it does, relative strength. It essentially takes the momentum used by technical analysis practitioners to measure the recent price change in a currency pair to determine whether the market is going to be thought of as overbought or oversold. It is an oscillator that displays itself on the bottom of the chart, with a reading between 0 to 100. It has been around for roughly fifty years, and many traders use it in various time frames.
The basic idea behind this indicator is that trends tend to get a bit overdone at times, and thereby you should see an occasional reversal when things have already gotten out of hand. There is what is known as a “look back period”, which is commonly 14 candles. You can change it of course, but the standard is that particular number. The RSI will measure the percentage gains over the last 14 candlesticks, measuring an average. As an example, perhaps a currency pair has closed 10 of the last 14 days with an average gain of 1%. The remaining 4 days had an average loss of -0.5%. The indicator then calculates the corresponding figures, and plants it on the oscillator below the chart. The indicator will rise as the number of positive closes increases along with size, and it will fall as the number and size of losing candles increase. Through a smoothing algorithm, the indicator then determines whether or not we are overbought or oversold.
When the indicator reads over 70%, then the market is in danger of being overbought. When the indicator reads below 30%, then it indicates that the market is in danger of being oversold. It is at this point that the trader starts looking for opportunities in the opposite direction, or simply looks to take profit if they are already with that trend. This of course is a repainting indicator because it moves its calculation along with the previous 14 candles, meaning that the next candle will cause the drop of one the previous candles and it looks back a static amount of distance.
Take a look at the indicator below and notice where it is in overbought and oversold conditions:
Previous Day’s High / Low
While not strictly speaking an “indicator”, knowing where you are compared to key highs and lows of recent trading sessions makes a huge difference in how things work out and is a part of technical analysis. The professional day trader tends to keep an eye on various important levels, such as the high or low of the previous day, because in and of itself it suggests that momentum is picking up if such a level is exceeded. If you think about it, simplicity is once a genius about using this strategy. If there is a specific level that caused resistance yesterday, but now we are trading above it, then it shows that momentum is continuing to the upside and of course vice versa.
Remember, one of the great things about the major Forex currency pairs is that they tend to trend over the long term. For me, the best non-repainting Forex indicator for day trading is this simple little “hack.” After all, it keeps you in tune with the trend, especially if it is in tune with the longer-term weekly trend. Most Forex long-term trends tend to last for several years, so while nothing is a 100% guarantee, trading with that trend and of course as the market breaks through a support or resistance barrier is a powerful combination in and of itself.
Take a look at the chart below. You will notice that I have the previous daily high marked on the chart. It is obviously a non-repainting indicator because that high does not change regardless of what happens during the trading session. As we break above that high, more and more traders joined the fray as they recognize that we are going much higher.
I also point out that the 8.23 area that had been broken in the above chart has also offered support a couple of times already during the session on the 5-minute timeframe. By doing so, we also have an area where we need to get out of the trade if it starts to work against us. For those of you following along, this happens to be the EUR/TRY pair. This was also confirmed by the daily trend which is obviously higher. Take a look below:
By combining the different time frames and going with the overall trend, you are essentially just looking for the market to confirm that it is ready to continue going higher. Does this work 100% of the time? Of course not, but nothing does. By putting the odds in your favor, you are on your way to profitability, and this simple “indicator” is one of the most reliable things that I have found over the years. As you can see, this works in both directions, and is especially powerful when matched up with a strong trend.
By keeping things relatively simple, you can focus more on opportunities and what really matters instead of looking for complicated signals, and waiting to get involved, commonly known as ‘paralysis by analysis.”
It is best to use non-repainting indicators as you will learn more and improve as a trader better that way, as you will understand the indicator prints better if they do not repaint.
The RSI is one of the very few indicators whose studies have shown has some predictability when used on multiple time frames, because it indicates momentum.
Key highs and lows are excellent “lines in the sand” showing whether support and resistance is tending to hold or be broken in one particular direction.
If you learn to master these simple tools, you will have a good chance of becoming a profitable day trader.
Forex Indicators for Day Trading FAQs
Which Indicator is best for day trading?
The relative strength indicator (RSI), the exponential moving average, and the previous day’s high and low price are the best indicators to use in day trading.
Which is the most accurate indicator for Forex?
The relative strength indicator (RSI) is one of the very few Forex indicators which has been proven to have some predictive power regarding future price movements.
Which is the best EMA for day trading?
Using a fast and short EMA can be very effective in day trading. Typically, combinations such as the 9 and 50 period EMAs are used.
What is the best chart for day trading?
A Japanese candlestick price chart works best for day trading.