Day trading indicators serve as the basic tool to perform technical analysis in determining future economic, stock or financial trends. They are often extremely helpful to the investor in determining optimal entry and exit points in a trade. Using a variety of data points, the results of the analysis derives its conclusions by applying a formula to all the available information. These data points can include the opening, low, high and closing figures, over any specific period of time.
Operating differently than using economic reports, day trading indicators do not use profit margins, revenues or earnings as part of their analyzing strategy. An active trader will use the results of this information almost exclusively because it instantly identifies short-term price movements. For the long haul investor using the “buy and hold” method, most day trading indicators hold little value.
The easiest way to view the indicators is by developing a technical chart, which can be described as a picture or graphic representation of all the activity in the market concerning a trading instrument, along with its downward or upward movements over time. It may also include other formations such as trading volumes. By taking all of the data points and placing it on a chart, an instant wave-like pattern can be generated. Once the information is charted, a technical analyst can employ mathematical formulas and generate specific technical indicators. Day traders take this detailed data and use it to assist in predicting the future market price or trend of a contract, stock, or currency pair.
Technical analysis experts create two different types of indicators including lagging and leading. A lagging indicator (sometimes called a trend-following indicator) will follow the action of the market price. This type of indicator works best when a security or market has developed a strong and lasting trend. The indicator will often signal that it is time to take a long position and keep it while the trend is active and intact.
Leading day trading indicators provide optimal information for signaling the optimal moment for entry or exit of a market. It typically happens before a change, providing signals to opportunities for trading in the market. The variety of technical indicators includes volume, trend and momentum indicators along with common oscillators.