Question:

For day trading, which three technical analysis indicators do you find most helpful and over which timeframes? Would you use any specific ones for forex as opposed to equities?

John from Indicator, Ill.

Answer:

John, your question is complex to answer, as technical analysis defies easy answers. For every trader using this indicator for that purpose, there is another using that indicator for this purpose. The problem lies in the sheer volume of technical indicators and the possible combination of those indicators to achieve a specific outcome. However, since you asked me which three I find most helpful …

My trading approach is simple. I don’t rely on reading charts, and fundamental analysis means little, as I trust nothing about corporations and their financial doings. However, I do use some technical tools to confirm my potential trades, once I find them (which is another answer to another question coming soon to a column near you). Although I might use more indicators (depending on my need), the following three are the most important to me.

1. Volume – Without a doubt, if you are in the business of looking for trends, no indicator comes close to volume. After all, the game we play is about buying and selling, and the more buying and selling going on, the stronger the trend. Huge volume usually indicates an obvious direction preference. The thing I watch for initially is an up-volume trend building over a short time period (“short” is relative to your trading timeframe). Volume slowly building over time (say 7-10 days or more) indicates a stronger trend developing. This volume increase is what I want to see. On the other hand, low volume usually means a flat market open to the possibility of huge price swings in a single trade. This is good for intra-day traders, but not so for those in longer positions. Keep in mind, getting into these trades is usually easier than getting out.

2. RSI – The Relative Safety Index is a confirmation for volume. It tells me if the market is overbought or oversold; thus I have a clearer understanding of what volume means for my trade. This indicator can also flush out a potential change in trend direction, which means, you might be seeing a top or a bottom in the trend.

3. MACD – Momentum is a key to longevity of a trend. The MACD gives me an idea of how strong the trend is (along with volume and the RSI), and whether a trend is about to shift direction. As well, this indicator can act as confirmation for oversold or overbought conditions in a market.

As to which indicators one would use specifically for forex, well, I guess that choice is up to the trader.

Trade in the day; invest in your life …

Trader Ed