Technical Indicators And How To Choose Them For Day Trading

technical analysis indicators

Day traders use technical analysis indicators out of absolute necessity.

It would be incredibly difficult to make profits consistently on fast time frames by just relying on fundamental data.

As a trader, it is mandatory to use tools that show market data and price action to help you form decisions.

But what is technical analysis and how do technical indicators help traders make better decisions?

Which indicators do you add to your trading toolkit and how do you even pick them given there are about four thousand indicators out there?

For markets that have fixed volumes like the stock market, few indicators are as powerful or useful as volume because it confirms trend directions.

However, there are other important indicators that compliment volume, which we’re going to look at later in this article.

But before going any further, let’s explain what the terms technical analysis and technical indicator actually mean.

What is a Technical Indicator?

To understand what technical indicators are, you need to first know what technical analysis is and who the individuals who practice it are.

In financial markets, technical analysis simply refers to the study of price action on a chart. Technical analysis mostly involves studying of price charts, which is why those that engage in it are called “chartists.”

A technical indicator, on the other hand, is a pattern-based signal that is derived by applying a formula to the price data of a financial instrument like a stock.

Technical indicators use mathematical calculations based on historical volume and price action to predict future price directions, providing traders with entry and exit signals.

These signals suggest a potential price and time for a trader to enter a trade, with the target of making a profit from the predicted move in price.

Simply put, indicators are tools that assist traders in using history to determine the most probable path of a stock’s price in the future and they form the foundation for technical analysis as a whole.

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William K. 2 weeks ago Member's comment

Thanks for an understandable explanation of some of the jargon. I do appreciate that. One interesting thing is that in almost every prospectus and many reports, there are words explaining that "past performance is no guarantee of future performance", and to me that seems to be in direct opposition to the whole concept of examining performance to determine trends. Or is the whole difference in the meaning of guarantee versus indicator of probability?

No matter what, thanks for the educational explanations.