Day Trading Indicator Set Up for Beginners: 2021
Day trading indicators - what are the best indicator settings on your broker platforms and how exactly do you use them?
One of the most commonly asked questions I get is what indicators do I use in day trading, and which ones are the best to make you millions of dollars.
As someone who has been day trading for a good six years now, I’ve certainly gone through tons of indicators from MACD, RSI, parabolic SAR, moving averages, VWAP, ichimoku clouds, and bollinger bands.
I personally do not suggest relying on indicators, but I get it, if you are a beginner trader this is usually where people like to get started with finding the perfect entries and exits. I traded with many indicators myself when I was first learning to day trade as well.
While I no longer use any indicators besides VWAP, I still know a few things about all these various indicators and the best ways to use them. When I was using indicators to trade, the best way I found was to use them in pairs.
This means that no trading indicator is really that useful on its own, but they become very powerful when you put, for example, RSI and MACD together and vwap and moving average as a pair.
In this blog we will be talking about the most popular indicators out there and how to best use them for day trading beginners, as well as the problems with relying on these indicators. There is no right way, or wrong way to use these indicators, however, it's all up to your personal trading style.
MACD and RSI
So first and foremost, the indicator pair that so many day traders love to use is the MACD and RSI. MACD stands for moving average convergence divergence. This is a trend indicator, meaning that it tells you when there is a reversal of trend coming along, whether a stock is starting to breakout to the upside, or selling off to the downside.
Reading MACD indicator
The whole purpose of using the RSI indicator is to pick the top and bottom of a stock. Which sounds kind of similar to trend reversal with the MACD indicator.
That’s why people like to pair these two indicators up in day trading. Because just by itself, MACD is a lagging indicator. Meaning that it takes a while for the fast line and the slow line to decisively converge. This is fine for swing trading in general, but for day trading where precision in entry and every single second counts, it's not exactly ideal.
The oversold RSI is just there to remind you that a reversal could potentially happen soon. Same thing with the sell off here, yes the RSI indicates that the stock is oversold you can start looking for entries to bounce the stock back, but the MACD hasn’t confirmed a crossing yet to indicate the upside. So you wait for both of these indicators to align before taking an entry.
So as you can by using this RSI and MACD indicator pair does, yes it indicates to you where there is a potential reversal coming soon, but still requires you to be patient and wait for confirmation, instead of jumping in right away when you see there is a potential top to enter short, or a bottom to enter long.
I personally found this indicator pair to work better when trading mid cap and large caps - not so much for trading volatile penny stocks. Is this RSI and MACD indicator going to give you 100% win rate all the time? Absolutely not, nothing is 100% guaranteed in day trading.
Vwap
I find the better indicator pair to use for trading low float penny stocks is vwap and 9 ema pair. Vwap stands for volume weighted average price. It indicates relative strength or weakness of a stock. For example, if a stock is trading above vwap, that means it's bullish, and the majority of the volume are the buyers.
If a stock is breaking beneath vwap, that means it's weak and the sellers have control of the stock. That is simply just the most general way people use vwap. It's a guide to indicate whether the stock is a bullish short term or bearish short term.
If a stock is just trading around vwap, holding above it for a little but breaking down really quickly only to come back up again, that means generally the stock is choppy and the direction is undecided, or that could indicate a vwap trap.
Because vwap is such an extremely general strength indicator, how everyone uses it is slightly different and how hard the stock pulls away above or beneath it could indicate a potential extension.
At the moment, I just use vwap by itself, but I have found that combining the vwap indicator with the 9 ema to be quite useful. EMA’s stand for exponential moving average which tracks the overall trend of a stock over a designated period of time.
What's the difference between EMA’s and SMA’s?
Compared to SMA’s, the EMA’s put more weight on the current price fluctuations. So this indicator reacts faster to current price changes, so it's more ideal for active intraday trading.
On the other hand SMA’s updates are slower because it calculates the overall period weighted equally. So SMA’s are better for swing trading and longer term trading generally.
Now what this 9ema and VWAP pair does is that it indicates the start of a very strong breakout, generally speaking. Again you can set this up by going to studies, edit studies in thinkorswim and look for moving average exponential.
So using the VWAP and 9EMA pair is really simple. Since vwap shows you the strength the ema shows the trend. If you put them together that should indicate to you when the strongest trend change is going to occur, right?
The further the white 9ema pulls away from vwap, that indicates the stronger the breakout is to the upside. And vice versa on the downside. So that tells you not to fight the trend or the strength, just buy the dips if the stock is strong, or short the pops if the stock is weak.
Why I stopped using indicators
In my opinion, it is a distraction from observing the real price action of the candles. All these indicators look picture perfect in hindsight after the move has finished. It's just like memorizing patterns. These things do not provide you the little nuance regarding who is trapped in pain and where the momentum is going.
In real time, the way the candles move and how hard it rejects a resistance or bounce off a support, that's real price action. That's the only indicator really in real time, that's not lagging and that can really give you the best anticipations and confirmations in day trading.
Don't get me wrong, using indicator pairs is a good way to get started for beginner traders to start seeing the trend changes and where the overall condition might be extended to the upside or downside.
Once you start seeing some progress trading that way, shift your attention to observing the candles and price action in real time. You will find that doing so will give you way better entries and better read on the stock.
