What if someone gives you Aladin’s Lamp for Trading? You will identify an equity trade within 2 minutes. Trading indicators do this job of trade identification. Over time, technical analysts analyzed price action and coded it to predict the upcoming price action in the form of trading indicators. So a trading opportunity can be identified quickly by applying trading indicators. Observing their utility for trading, traders have developed hundreds of trading indicators for equity markets.
This article covers the best indicators for trading which have been time-tested and have the highest success rate. It explains the applicability of the indicators, their cons, and special tips for best trading outcomes.
Contents
1. Triple Moving Average Crossover:
It is the most reliable trading indicator. Apply 3 moving averages to the price chart; one short-term MA (10), a second medium-term MA (20), and a third longer MA (100). By hit and trial, you can adjust the MA duration best suited to the equity market being traded.
How to trade MA?
Whenever the price crosses above or below moving averages, it is a good signal for trade on the long or short side. After price, if both short-term and medium-term moving averages cross above the long-term moving average, it is a never-failing sign for a long-term bullish market. This triple MAs cross-over is also termed a death cross as it offers a sure and long-term trend ride. Conversely, if both MAs (short and medium) cross longer MA downward, it is a strong signal long-term bearish trend.
Cons:
Though successful in identifying the right trades, the moving average is a lagging indicator.
Tips:
- Experience teaches that moving the average produces better outcomes in the trending equity market. So it is advised for a trending market, not a sideways movement.
- Select best best-suited MA duration for your equity instrument by hit and trial.
2. Relative Strength Indicator (RSI):
RSI is one of the best indicators for equity trading with considerable accuracy. It measures the momentum of ongoing price action by comparing the latest market price action with the preceding market move.
How to trade RSI?
If the RSI line is on a rising trend, the momentum of the ongoing trend is increasing so trade in the long side. On the other hand, if the RSI line is declining, trade on the short side.
Another way to trade RSI is to use it as an oscillator. If the RSI value reaches the upper extreme side (above 70), it reflects an overbought market, and selling is recommended. Conversely, if the RSI line drops to the lower extreme side (below 30), it indicates an oversold market, and buying is recommended.
Still, another most reliable equity trade signal is trading RSI divergence. If the price makes lower lows but the RSI line stops lower lows, it is a bullish divergence and a reliable signal for a bullish trend reversal. Similarly bearish divergence is a reliable bearish trend reversal signal.
Tips;
- Apply moving average (13-day) to RSI. When the RSI line crosses above the moving average line, it is a buy signal, and vice versa for a sell signal. This combo forms one of the best equity trading indicators.
- Construct a trend line for the RSI line. RSI trend line leads the price trend line. When the RSI trend line breaks, it is a reversal sign in advance.
3. Moving Average Convergence Divergence (MACD):
MACD is one of the top equity trading indicators. It utilizes moving averages to generate a trade signal. Carrying both trend change as well as momentum forecasting ability, MACD is most suited for trading indicator beginner traders.
How to trade MACD?
Whenever the signal line of MACD is above the MA line, a buy signal is generated. If the signal line crosses below the MA line, selling is recommended.
Another way to use MACD for trading is MACD divergence with price. If the price makes higher highs but MACD fails to register a higher high, it is a bearish divergence and selling is recommended. Similarly, MACD bullish divergence is a reliable signal for bullish trend reversal.
Tips;
- Use MACD in combination with RSI. MACD will indicate when to enter a trade whereas RSI will prompt overbought/oversold regions for trade exit.
- MACD is a good and recommended indicator for the trending equity market.
4. Bollinger Band (BB):
Bollinger band is a simple but effective equity trading indicator for new traders. It identifies price trends as well as price volatility by moving averages and divergence from MA.
How to trade?
A buy signal is generated when the equity price crosses above the center line of the Bollinger band. Uptrend prevails as long as the price remains above the center line. However, if the price moves rapidly to close outside the Bollinger band, it is a sign of an overbought market and it should caution a trader to book a long position.
On the other hand, a selling signal is generated when the price crosses below the center line of the Bollinger band. The downtrend prevails until the price remains below the center line. Anyhow if the price closes below the lower cloud, it reflects an oversold region and signals a trader to close the selling position.
Tip;
Closing and opening of price outside the Bollinger band is a strong signal for trade i.e. when a candle closes outside the Bollinger band and the next candle opens outside the boundary of the Bollinger band, it is a reliable trade signal.
5. Ichimoku Cloud:
Ichimoku cloud is an accurate technical indicator that combines moving averages and cloud. Moving average cross generates a trade signal whereas the cloud reflects the price volatility range.
How to trade?
If the price is above the cloud and the conversion line (blue) crosses above the baseline (red), it is a buy signal. On the other hand, if the price is below the cloud and the conversion line (blue) crosses below the baseline (red), it is a sell signal.
The cloud acts as a support or resistance for the price.
Tip;
Whenever the price crosses above or below the cloud, it is a strong signal for trade.
How to Apply Technical Indicators in Equity Trading?
All the trading platforms like Tradingview, MT4, and brokers’ applications offer in-built equity trading indicators. Any indicator can be applied through the indicators tab. For example, to apply tradingview indicators for equity, type the short abbreviation like MA, RSI, MACD, etc. in the indicators tab. The indicator will appear and selecting it will apply it to the equity chart.
Which Indicator is the Best for Equity Trading?
Although trading indicators offer reliable trade signals, none is 100 percent accurate all the time. Some indicators are good for the trending market whereas others are reliable in sideways market movement. Combining more than one indicator can increase the trading success rate.
Moreover, using trading indicators in conjunction with technical analysis can significantly increase your trading success rate.
Conclusion:
While the selection of trading indicators ultimately depends on individual trading styles and strategies, the aforementioned indicators have proven to be valuable tools for many traders. Each indicator brings unique insights into market trends, momentum, volatility, and potential reversals.
It is important to note that no single indicator can guarantee trading success, and combining multiple indicators or using them in combination with other analysis techniques can provide a more comprehensive view of the market.