InvestorQ : What are the some of the key technical indicators for the intraday trading segment in the Indian markets?
Khushi Patel made post

What are the some of the key technical indicators for the intraday trading segment in the Indian markets?

Arya Nanda answered.
2 years ago

Intraday trading has emerged as an important chunk of the daily market volumes in the cash equity segment. Intraday trading can be done on the long side or on the short side. That means, you can buy a stock in the morning and close it out on the same day. Alternatively, you can also sell the stock in the morning and cover your position before end of trading on the same day. When you select a trade for intraday, then you need to close out the trade before end of day. If you don’t do so then most online brokers have the system of automatically closing your position in the last 15 minutes of trade.

Technical market indicators constitute a very important approach to decide which stocks to trade and at what levels to trade. As an intraday trader, you are essentially trying to assess 4 things in the market.

· What is the underlying trend of the market? Is it a bullish trend, bearish trend or a flat trend? Your trade direction will largely depend on this question.

· Whether the momentum is in favour of the bulls or in favour of the bears. As a trader you always need to stay aligned to the direction of the market momentum

· When you take a view on a stock, are you trying to bet on the potential price movement or are you trying to bet on the movement due to volatility in the stock?

· Are the volumes and liquidity sufficient to ensure that the trader can enter and exit the stock without too much of a liquidity risk

Let us now turn to some important technical indicators for the stock market analysis purpose.

Indicators for intraday trading – Moving Averages

When you listen to market analysts and traders explaining you about a stock, they normally talk about 50DMA and 100 DMA. They are basically moving averages which are calculated as a continuous series of prices to smoothen out the ups and downs in the price. Moving averages are useful in identifying when the stock is likely to break out either on the upside or the on the downside. As an intraday trader you make most money when you are able to time your trade around the time these moving averages are breached. The basic thumb rule in moving average analysis is that if the short term averages are exceeding the long term moving averages, it is a bullish signal. For example if the 50DMA is above the 100 DMA and the 100 DMA is above the 200 DMA then it can be interpreted as a bullish signal.

Indicators for intraday trading – Bollinger Bands

The Bollinger is a slight expansion of the concept of moving averages. The DMA only captures the mean values of the prices. It does not compare the stock based on volatility of the stock. Volatility is very important for an intraday trader for two reasons. Firstly, it explains the extent of risk in the trade for the intraday trader. Normally, higher the volatility higher is the risk for the trader and that impacts the choice of stop loss and also the choice of profit target. Secondly, Bollinger Bands use range as a measure of standard deviation which enables to define the trading range in a more granular fashion.

Indicators for intraday trading – Oscillators

The beauty of intraday trading is that you need to neither be bullish nor do you need to be bearish to take a view. You can take a view on the cycle and actually ride the cycle in both directions. That is where oscillators can be of immense help. Oscillators are extremely useful in identifying when the market sentiments are turning so that the intraday traders can position themselves accordingly. In fact, when the oscillator does not keep pace with the price movement it is an indicator that the price rise could weaken and traders can position themselves on the short side of the trade.

Indicators for intraday trading – RSI

One of the very popular and incisive technical measures for intraday traders is the relative strength index (RSI). The RSI considers the gains and losses in the market and by plotting the relative strength chart over a period of time it gives important pointers towards the future direction of prices. The RSI is again evaluated within a range and when it hits a certain threshold it is supposed to be indicative of a turnaround in the market. That is useful for intraday traders to position themselves profitably. Normally, the RSI acceptable range is 70 on the upper side and 30 on the lower side. Intraday traders can safely initiate long positions closer to the RSI band of 30 and initiate sell positions closer to the upper RSI band of 70.

These four indicators are useful for an intraday trader in the sense that they not only capture the momentum of the markets but also capture the critical pivot points where the stock turns around