It is important to have some market analysis tools at your disposal for determining where to buy or sell. Leave the trading on a ‘gut feeling’ behind and try these 6 day tradin tips.
Aside from analysing the fundamentals of the asset that you wish to trade, there are some market-based tools that can help your timing when day trading. These are out 7 tips on what to use:
1) Use Price Charts
The FlowOne trading platform shows the 3 main chart types (or chart styles). That is candlesticks, bar chart and line chart. The three types of price charts are plotted with time on the horizonal axis and price on the vertical axis.
Each chart type shows how price moved over a period, you can set the time period for each chart - for example 1 hour, 2 hours, 1 day, 1 week etc. The line chart will show you the closing price for each period. The bar chart and candlestick chart show you the opening price, highest price, lowest price and closing price (known as OHLC) over that same time period.
2) Use Volume data
Volume can be measured in different ways but the most common is just the total number of contracts that have traded over a period. The volume is typically plotted at the bottom of the chart as a histogram - and each bar or candle will match one period in the volume histogram. Day Trading strategies often use the relationship between price and volume to determine future movement in the price.
3) Do Trend Analysis
Before any effort is made to understand price patterns and technical indicators, the very first thing any trader must to is determine the current trend in the market. There are indicators to support this, but the simplest method is to simply observe the slope of the chart. The chart can only be doing one of three things, trending up, down or sideways.
Beyond the slope of the chart, traders can look at what is happening at the turning points, known as ‘highs’ or ‘lows’. In an uptrend, the price will make higher highs and higher lows, while in a downtrend the price will make lower highs and lower lowss.
4) Follow Market Momentum
It is time to take a trip down memory lane to your high school physics lessons and Sir Isaac Newton. Momentum is the impetus gained by a moving object. In this case the ‘object’ is price. Price momentum is the speed at which the price is changing. Momentum can be measured by eye, looking at the steepness of the slope, or with mathematical indicators.
If we relate this back to our study of trends, we might say that an uptrend is gaining momentum or losing momentum, likewise for a downtrend. This is useful because you ideally want to buy just as the uptrend starts gaining momentum and sell as the price starts to lose momentum.
5) Learn Japanese candlestick patterns
How the Open, high, low and closing price relate to each other over one or two periods tends to repeat in useful patterns over time. This technique was first used in Ancient Japan by rice traders but is now commonplace in modern day markets. The patterns fall into one of three groups ‘reversal’ patterns, ‘continuation’ patterns or a pause.
Here is a cheat sheet showing some of the most popular Japanese candlestick patterns.
6) Pick 3 Technical Indicators
Now that we have established the main tools to use the price itself for analysis, we can move on to mathematical equations for what the price has done, known as technical indicators. These indicators are split into two main categories ‘overlays’ and ‘underlays’. As the name suggests, overlays go over the top of the price and underlays go in a separate box underneath the price chart.
We cover some examples of each in the next sections. One variation of the underlay is an oscillator, where the indicator will normally be a line that oscillates between -1 and +1.
A) Moving averages
A moving average is simply the average price over the last 20 period, going back through time. An example might be the 20-day moving average. The current value of the moving average is the mean of the last 20 days, however when the price opens the next bar or candle, the average will adjust by calculating the new average including the latest day and dropping the price from 21 days ago.
You can see from the above example that the moving average smooths out the price, while lagging the price. It is therefore best used for determining the trend of the market. While the price is above the moving average and the moving average is sloped up, there is an uptrend. While when price is below the moving average and the moving average is sloped down then there is a downtrend.
B) Relative Strength Index (RSI)
The RSI stands for Relative Price Index. It is an example of an oscillator. It is most often used as a way to determine when the market is overbought or oversold - meaning that momentum has gotten overextended in one direction- and can often foretell a snap back in the price in the other direction. The RSI tends to be best used in rangebound or sideways markets because when there is a trend it can remain overbought or oversold for long stretches of time.
Another popular way to use RSI is to look for divergence. That’s to say when the price makes a new high in an uptrend or a new low in a downtrend but the RSI does not -this can be a leading indicator that the price trend is about to reverse.
Another popular underlay indicator that is not an oscillator is the MACD, which stands for Moving Average Convergence Divergence. This can also be used as an overbought or oversold indicator or with divergence, just like the RSI. However it is more commonly used to verify the trend. If the MACD is over the zero line, it signals an uptrend, whereas a MACD below the zero line signals a downtrend.
Some traders will use the zero line on the MACD as a trigger to open and close trades, where as other will use it to determine the trend and whether they want to be buying or selling.
You can try a FlowBank Trading Account to practise using these 6 tips in a simulated trading environment.