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6 Jan, 2023
7 mins read
Day trading has become one of the most widely used trading techniques in the history of the Indian stock market. While there are umpteen ways of practicing day trading proficiently, nothing can beat the efficacy and the head start a holistic technical analysis will provide to a trader. FYERS presents blog on the most popular technical analysis strategies for day trading. So, without any further ado, let’s get started.
Before we jump to the significant concern of this blog, let’s understand the meaning of “technical analysis”. In the modern probability and financial statistics’ terminology, technical analysis is nothing but a way of obtaining the past as well as future performance with reference to the price fluctuation of any asset or security with the help of several indicators, tools, and charts.
Many people often confuse technical analysis with fundamental analysis. While the former deals with statistical indicators such as historical performance, price, etc., the latter involves a lot of macro economic and micro economic indicators such as revenue, earnings, and to name a few.
As per money and financial market experts, technical analysis proves out to be a better decision-maker for most traders than fundamental analysis. This is because it considers the past price movements which fundamental analysis quiescently ignores. Wondering why and how? Let’s understand what all indicators does technical analysis use to guide traders and how can these be molded to arrive at the right trading decision.
If you haven’t tested your waters in the stock market with any technical analysis strategy as of now, then this section is a must-read for you.
Technical analysis can be practiced in the form of two basic approaches:
The Bottom-Up approach
The Bottom-Up approach is a way of analyzing an asset or a security and landing at the potential entry and exit points. Usually, investors who wish to invest for long-term opt for this approach. This approach helps them to get a long-term perspective of trading by landing on the right trading decision.
The Top-Down approach
The Top-Down approach glances over the economy and then the entire stock market before focusing on one particular security or asset. Usually, investors who wish to invest for short-term opt for this approach.
Now when you are well-versed with the basic approaches of technical analysis, it becomes imperative to understand the tools and indicators of technical analysis strategies for day trading. Following is a list of the most popular tools of technical analysis strategies that can be used for day trading:
Accumulation/Distribution (A/D) Line
At the end of the day, one needs to determine the money flow of an asset or a security via technical analysis strategies. This is how the accumulation/distribution line (A/D line) indicator comes into the picture. Here, instead of considering only the closing price, we also look at the trading range for a particular period especially the point where the closing price is the closest to the range. Two outcomes can be reached with the help of this indicator:
➤ If A/D line is rising, then it is an indicator that the stock is closing at a point that is half-way above the trading range. This is a confirmation of the uptrend. This implies that the A/D line is an indicator of buying interest i.e., the stock is trending up.
➤ On the other hand, if the A/D line is falling then this means that the stock is closing at a point that is half-way below the trading range. This is a validation for downtrend.
Besides this, the A/D line helps in identifying trade divergence. A trend is said to reverse if the price is rising, and the A/D is falling. On the other hand, higher prices might unravel if the price is falling, and A/D is rising.
Aroon Indicator
Over the calculation period of an asset or security, it’s important to know how to find if the price will be rising or falling. One of the best ways to do this is with the help of the Aroon indicator. Here, two indicator lines help in determining the beginning of the trend - the Aroon Up line and the Aroon Down line. A change in trend is earmarked by the intersection of the Aroon Up line and the Aroon Down line. This change in trend can be confirmed as an uptrend if the Aroon Up line lands at 100 and Aroon Down line is close to zero. On the other hand, if the Aroon Down line intersects the Aroon Up line at 100, then this is validation of a downtrend.
Average Directional Index (ADX)
This trend helps in determining the momentum of a trend and how strong it is. It is shown using a black line.
➤ If ADX is 40 or above it, then the trend is said to be directionally strong.
➤ If ADX is 20 or below it, then the trend is said to be directionally weak. The trend is also termed as “non-trending”, then.
In addition to that, we show a red-coloured line called DI+ and a green-coloured line called DI-. All three of these tell us the trend and its momentum.
Donchian Channel
When it comes to intraday trading, nothing is as important as volatility. To analyze the volatility indicators, we take the help of the Donchian channel. It is calculated with the help of the lowest low and the highest high of a trending period. Every breakout from this channel is seen as the onset of a new trend. There is a pre-defined relationship between price and the Donchian channel:
➤ Whenever the price is stable, then the Donchian channel is said to be narrow.
➤ Whenever the price is unstable, then the channel is said to be wider.
Moving Average Convergence Divergence (MACD)
The moving average convergence divergence (MACD) works in similar fashion as the ADX. But besides this, it also releases trade signals. Apart from the MACD line, there is also a slow-moving line called the signal line. The relationship between these two is summed up here:
➤ When MACD line touches a point below the signal line, then the price is bound to fall. Here, the trader should opt for short trade.
➤ When the MACD line touches a point above the signal line, then the price is bound to rise. Here, the trader should buy.
On-Balance Volume is the difference between the Up volume and the Down volume. The Up volume is the volume on a particular day when the price is being rallied. The Down volume is the volume when the price falls. Depending on the price fluctuation of that day, the volume is either added or subtracted.
➤ When the OBV is rising, it indicates that the buying tendency will push the price higher.
➤ When the OBV is falling, it indicates that the selling tendency will lower the prices.
This is how OBV becomes a trend confirming indicator for the most popular technical strategy analysis.
SuperTrend
The SuperTrend indicator indicates two observations:
➤ When the trend is below the bars, the SuperTrend labels the trend as upward.
➤ When the trend is above the bars, the SuperTrend labels the trend as downward.
For this indicator, we use the Average True Range (ATR). This is because ATR is instrumental in computing the ongoing trend as well as the volatility.
Volume Weighted Average Price (VWAP)
A volume indicator, VWAP is the ratio of the stock’s value at a particular time to the total volume traded of that stock.
➤ When the stock’s price is above the VWAP, then this indicates a bullish trend. Here, you can sell in the direction of the trend as earmarked by VWAP.
➤ When the stock’s price is below the VWAP, then this indicates a bearish trend. Here, you can buy in the direction of the trend as earmarked by VWAP.
So, these were a handful of indicators that can help one in practicing day trading via technical analysis strategies more efficaciously. The best way to understand the working of these tools and indicators is via practical application. So, prick the trader inside you and get, set, trade. Happy trading!
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