Day Trading Trend Analysis

Day Trading Trend Analysis
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As day traders say, “The trend is your friend.” Of course, finding that trendy friend requires familiarity with day trading trend analysis and how to find the trend in day trading. Day traders rely on technical analysis, using various indicators to determine the trend of any particular security. One caveat: While these indicators are the lifeblood of day traders, it’s crucial to have a thorough understanding of each indicator before making monetary trades. Without preparation, it’s easy to misinterpret some indicators, causing chaos in your trading operations.

How to Find the Trend in Day Trading

First, let’s define the trend. Basically, it’s a stock or other security price that continues to move in a particular direction. Trends can only go three ways: an uptrend means the price is moving higher, a downtrend means the price is moving lower and a sideways trend indicates sideways movement. While all trends move in one of these directions, prices almost never move in a straight line. That’s where a moving average comes in, as this technical tool allows day traders to see where the trend is heading.

Moving Averages

A moving average is a security’s average price during a specific time period. Moving averages are key indicators for trend day trading, as they are an effective and simple way to gauge trends in a fast-paced market. These indicators let you know whether your move is short or long. The type of moving average most valuable for a trader depends on the trader’s time frame. While long-term investors and traders may rely on the 200, 100 or 50-day simple moving average, day traders usually prefer the 10-day moving average. You want to place these moving averages on a five-minute chart, which you can do with shorter moving averages but not those going long-term. Day traders can also use intraday moving averages, showing the price trends for that day.

The simple moving average allows day traders to identify and trade the trend, but also provides direction for exiting a trade. If you are trading breakouts, a trend can only move in one direction. Should the moving average you use go flat, or the security breaches the moving average in late morning trading, that’s a red flag. For best overall results, choose a profit percentage target beforehand and exit when you meet it, even if the trend still looks promising. Odds are your trades will end up more consistently profitable when you “know when to fold them.”

Moving Average Divergence Convergence

The moving average divergence convergence (MACD) is another top indicator for ascertaining trends. This oscillator will also indicate momentum. The MACD calculates the difference between a security’s 26 and 12-day exponential moving average (EMA). The EMA reacts more quickly to price changes than a simple moving average.

As an oscillator, the MACD line fluctuates above and below zero. When the line is above zero the trend is upward, and a trend is downward when the line is below zero. Day traders look for buy signals when the line rises above zero and sell signals when the line falls below. The MACD also has a slow and fast line. Buy when the fast line moves above the slow line, and sell when the fast line moves below the slow line.

Relative Strength Index

The Relative Strength Index (RSI) is an oscillator moving between zero and 100, measuring the changing and speed of price movements. It can help determine a trend, as well as entry and exit points for traders. Traders usually consider the RSI overbought when it is over 70, and oversold when it goes below 30. When overbought, a correction is pending, while when oversold, the security may soon experience a bounce. In either condition, the RSI may remain overbought or oversold for an extended period. In uptrends, the RSI ranges between 40 and 100, while in downtrends it moves between 10 and 60.

On Balance Volume

As its name implies, the On Balance Volume (OBV) indicator considers volume – but it also shows whether that volume is forcing prices upward or downward. Day traders use the OBV as a confirmation indicator for price trends. Rising prices should show a rising OBV, and vice versa. If the OBV rises but the price hasn’t, it is likely the price will start to trend upward. If the OBV and a security’s price are moving in opposite directions – the OBV rising and the price falling –  that indicates a possible trend reversal.

Combine Indicators for Trend Trading

There’s no reason to rely on just one indicator for day trading trend analysis. Combine the indicators you prefer for trend confirmation and for entry and exit strategies. Use the RSI, for example, for trend isolation and entry points. Then apply a simple moving average as a chart overlay to identify exit points. For example, when the trend is up, plan to exit as the stock price falls below the line.

While combining indicators can help you make profitable trades, you also don’t want to overdo it. More than three is too many, and can give your conflicting signals. That’s another point – know the strengths and weaknesses of each of the technical tools you use. With that familiarity, you’ll have a better than average chance of identifying trends and earning money on your trades.



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