Day trading and it's indicators!
Day trading is one of the most important trading techniques. It is used via indicators. In this article I will present the best indicators for day trading.
Crypto trading is the main activity in this ecosystem. Several trading methods have emerged over the years and experiences. On the CryptoRobot channel we have presented some of them to you. Nevertheless, there are 3 that are out of the ordinary because they will depend on the duration of trading wanted.
Some traders will want to do as many trades as possible in a few minutes while others will take more time and accept longer trades. These methods range from very short term (Scalping) to medium term (Day Trading) to long term (Long Term).
In this article we will study day trading.
Where does Day Trading come from and how do you do it?
Day Trading** comes from traditional finance.
Traditional stock exchanges have operating hours. They coincide with the time zone in which the exchange is located. The goal was to create a framework for trading by having appropriate hours for everyone.
The CAC 40 opens for trading from 9am to 5:30pm. There is a pre-trade phase where orders accumulate but cannot be executed.
Day trading is a method of opening and closing positions in a single day. Why do this?
Between the closing and the opening of the market, many things can happen that can influence the general opinion of an asset.
In this case, a very high volatility can happen at the opening of the market. If the market had stayed open all night, the volatility could have smoothed out or potentially taken action to protect itself.
By closing all positions before the market closes, it protects the investor from a risk that he cannot quantify.
Day trading is therefore there to meet this need.
In cryptos, the market is open 24/7. By applying Day Trading we will force ourselves to close all our positions before the end of the day. By doing this, you are not exposed to the market when you are asleep or to the traditional markets that open and close constantly.
In day trading you will be trading on medium to short timeframes so you must have the right indicators. The strategies we present on our YouTube channel are in day trading. The purpose of this article is to introduce you to the best indicators for day trading. They can be found on our github.
Trend indicators :
The TRIX is our in-house trend indicator. It is composed of 3 stacked exponential moving averages. This configuration offers a stronger reactivity to different market dynamics. For day trading, this reactivity is necessary to keep trades short.
The TRIX is composed of 2 lines and a histogram (difference between the 2 lines). The first line is the TRIX and the second is its average. The bullish or bearish crossings between the TRIX and its average are action zones. The middle line of 0 gives an additional indication of the market trend.
I recommend coupling the TRIX with other confirmation indicators to clean up false signals.
Still in moving averages, we have the MACD. This indicator is built around a short and a long simple moving average. The short average brings the reactivity allowing the indicator to fluctuate strongly in timeframe 30 M or 1h.
Like the TRIX, the MACD is composed of 2 lines and the corresponding histogram. The first line refers to the MACD and the second to its average. Bullish or bearish crossings between the MACD and its average are entry or exit points. The median line of 0 indicates a certain direction of the trend. Finally, divergences are worth studying because they are very powerful on the MACD. A divergence on a high timeframe can guide your day trading.
I recommend pairing the MACD with other confirmation indicators to clean up false signals.
The Aroon is part of the oscillator family. Unlike its brother RSI, the Aroon is composed of 2 lines. The first one is "Up" and the second one is "Down". These 2 lines oscillate between 0 and 100. The Aroon Up increases in value when a market top is formed. If you are in an uptrend, the price will print several Tops in a row and thus allow the Aroon Up to stay at 100. Conversely, the Aroon Down will reach 100 when the price goes down and Bottom appears successively.
A bullish trend will therefore have an Aroon Up at 100 while a bearish trend will have the Aroon Down at 100.
This indicator comes into play at the time of the validation of a trade. A buy can only be made if the Aroon Up is at 100 or if the average of the Aroon Up over the previous X candles is higher than the average of the Aroon Down. Conversely for a sale.
RSI and Stochastic RSI
The RSI is the oscillator par excellence. It will vary between 0 and 100 to tell us if the market is overbought, oversold or balanced. The overbought, where the area between 70 and 100 corresponds to the moment when the market is increasing and there is excessive buying compared to the average. Conversely with oversold in the area between 0 and 30. The price tends to return to equilibrium in the middle zone (30 to 70).
The Stochastic RSI uses the same principle but is much more reactive.
The 2 indicators can be used to confirm or not transactions. A purchase cannot be overbought and vice versa for a sale. Moreover, the simple RSI allows the study of divergences.
- Volatility indicators
The best known volatility indicator is probably the Bollinger Bands. It indicates whether the market is experiencing high volatility or not. It consists of 2 lines that mostly encompass the price. An upper and a lower band. These bands are calculated by adding or subtracting the standard deviation from the moving average price. When the bands are tight, volatility is low and conversely when they are wide.
The indicator provides information on the dynamics of the market. Moreover, if the volatility is high, the price can break its bands. If a band is broken it can be considered as excess volatility and therefore a return to normal in the next few candles.
The Keltner channel
Same principle as the Bollinger Bands but here the channel adds or subtracts the ATR instead of the standard deviation. This small difference affects the evolution of the indicator and therefore its sensitivity. We often advise to test this channel of Keltner instead of the Bollinger bands. You never know, it can bring good surprises.
The Donchian Channel
A third channel that differs from the other two. We find the upper and lower channel but the calculation is different. Here, the value of the upper channel represents the maximum of the high on the X previous candles. For the lower channel it is the minimum of the low of the X previous candles. In the case of the Donchian channel, the price can never break the channel up or down.
This indicator can be used if you combine it with different parameters. If the short term Donchian is lower than the long term Donchian you have a bearish trend and vice versa.
Our latest volatility indicator behaves like a oscillator. The chopiness oscillates between 0 and 100 and indicates the underlying volatility. Between 0 and 30, there is high volatility, a trend is underway. Between 70 and 100, there is little volatility, the market is stable. The indicator does not indicate the direction of the trend only if there is one.
Chopiness can be used to confirm trades. Enter a position only if the chopiness is below 30, when there is a trend.
Another home made indicator representing the candles according to the associated volume. Volume is an extremely important metric. A candle is much more credible when volume is present. A break of support/resistance with volume confirms the move.
You have 6 types of candles:
The red : Negative candle with a very strong volume
The violet : Negative candle with a high volume but lower than the red one
The black : Negative candle without significant volume
The green : positive candle with a very strong volume
The blue : positive candle with a significant volume but lower than the green one
Grey**: positive candle with no significant volume
This indicator can be used to confirm breakouts of lines or patterns. In addition, the Volume Anomaly allows the study of trend reversals. The sequence between a red and a green candle (larger than the red one) indicates a reversal of the market.
Day trading is probably the most adapted trading method if you want to trade on the market. It allows for a thorough study of the market dynamics and indicators. In addition, a longer term analysis will allow you to adapt your trades. Being exposed to a single position for a maximum of 24 hours allows you to cover yourself from excessive volatility. Day trading, for your trading bots, will limit your drawdown and offer a sufficient quantity of trades for analysis.
Day trading combines deep market analysis with some recurrence of trades. The perfect mix between scalping and long term trading.