Which is best technical indicator for use in intraday day trading?

Intraday trading comparison of technical indicators to find the best technical indicator for use in intraday day trading

You might be a novice intraday trader, or an expert in intraday trading, your day starts with intraday tips, and selecting stocks for intraday trading.
But this is just where the day starts, and during the entire trading session, sometimes you need to change your intraday trading strategy. For this reason its important to understand not just the price movement, but also technical indicators that can give you a better view of where the stock is going in intraday, whether the trend is slowing down during the day, or is it picking up.

Here we will compare the most commonly used indicators, and find the best indicator for use in intraday trading. May be its something you've never used before!

Doesn't matter which technical indicator you use, there is one problem with each of them. You could be using any of the below technical indicators for your intraday trading, the problem persists .

  • Moving Averages, SMA, EMA, DMA
  • Bollinger bands
  • MACD, Moving Averages Convergence Divergence
  • RSI, Relative Strength Index
  • Stochastics

Moving averages:

 Moving averages:

There are different types of moving averages, namely Simple moving average (SMA), Exponential Moving average (EMA), and Daily moving average (DMA)
We are already aware that moving averages have a "lag" factor to them. It means that even if the price has already started moving in a different direction, still the Moving average will keep moving in the same old direction for a while.
So if were to use moving averages as a technical indicator for intraday trading, we'll get notified of price and trend change only after a certain time has already passed. This could be a major problem in intraday trading because intraday trading requires quick change in strategy, and if the technical indicator is lagging behind, then this could result in a "trade lost completely."

We work for small gains in intraday, sometimes as low as 1%-2%, and the lag in moving averages is much more than that.
This simply means that if we were using moving averages as our technical indicator for intraday trading, then the intraday prices would have already hit the targets, way before we got an indication of the trend change...
Even a fast moving EMA would not be able to keep with the fast changing prices in intraday trading...

Its clear that we cannot use moving averages for intraday trading. Lets look into the next one.

Bollinger bands

 Bollinger bands

Another old and popular technical indicator is Bollinger bands, which gives us an indication about how much prices are deviating within a certain time period.
If you look at the calculation of Bollinger bands, and if you've read the moving averages section above, then you'd reject this technical indicator at the very first step of its calculation. Here's why:

Step one for calculation of Bollinger bands:
A 20 day Simple moving average of closing prices for the last 20 days...
A month has total of 20 trading sessions. Imagine the lag...

Step 2 and 3 of this technical indicator use "mean" values of the last 20 day closing prices, which again uses moving averages in its calculations.
That is another lag on top of the first lag...

Once again, its clear that the technical indicator, Bollinger bands is not suitable for use in intraday trading. But the next one is somewhat better!

MACD: Moving Averages Convergence Divergence

 MACD: Moving Averages Convergence Divergence

Until now we've seen two indicators, and both depended on averaging closing prices. This one does too, but in a slightly different fashion.

MACD uses two EMA of different durations, and finds the difference between them to plot a histohgram.
This actually tells us if fast moving EMA (short), is moving close to the slower moving EMA (longer), or is it going away from it.
MACD generates different signals, and you can read about all of those in the MunafaSutra training material , but two primary signals it generates are:

  1. A cross over of the two MACD lines
  2. A cross over into the positive zone

Now look at the two images below: (the green and red histograms)
The one on the left is MACD using a very small setting, and the one on the right is MACD using default settings  short MACD  default MACD

As you can see in the MACD charts above, the first signal of MACD lines crossing each other was generated 2-3 days after the MACD line actually took a turn.
And the second signal of cross into the positive zone was generated much later. Actually 4-5 days after the stock took a turn for the good.

So we do know that MACD is faster, and better than other two technical indicators, but its still not the best for use in intraday trading. But how about Stochastics technical indicator? Is that the best technical indicator for use in intraday trading? Lets see...

Stochastics technical indicator

 Stochastics technical indicator

Stochastics technical indicator gives you a measure of how far the prices are from recent highs, or recent lows made by the stock.
Here too, the data used is a long prior time period, default is 14, and the calculation also uses simple moving averages in its calculations, which slows down the entire stochastics indicator, even fast stochastics.

Take a look at stochastics charts below, of the same stock as above, taken at the same time period.
Notice how it has already moved into the over-bought zone.
Remember how MACD has just started giving us a buy signal?
Which technical indicator will you listen to for use in intraday trading? MACD, or Stochastics?

 stochastics chart

I used a 5,3,3 setting, which is fast even for stochastics, but we needed something fast because our outlook is not of a positional trade.
We just want a trade for the next day. That's all... The reason this technical indicator, stochastics, is giving an over-bought signal is because the stock has been closing near day highs for the last few days.
If you trade based on stochastics, you'd go for a sell trade for the next intraday session, won't you?
You need to remember that once a stock reaches its over-bought or over-sold zones in stochastics, it can stay there for a good amount of time before switching its trend.
But before you do that, why not compare this with another technical indicator first, RSI, Relative Strength Index?

RSI, Relative Strength Index

 RSI, Relative Strength Index

RSI also tells us if the stock is in an over-bought zone, or in an over-sold zone, and it also tells us about the momentum of the trend.
Look at these RSI charts below. Top ones are RSI
 RSI charts

Much like stochastics, RSI technical indicator also follows similar rules.
20-30 is considered over-sold, and 70-80 is considered over-bought.
In this case however, we can see that RSI is pretty much moving close to 50 levels. When the sudden move happened, it was still at 50, which never gave us a definite signal.
Likewise, when its reaching 70 levels, you'd take a sell call, but you'd be surprised if you did that. Why?
This stock just gave 2 days of selling in intraday. It nearly closed near its highs other days. Look at the price line in the stochastics charts above. A completely different picture than RSI...
Closed lower only 2 days in a week, and went up every other day...

Till now its clear that all these traditional and popular technical indicators are failing in intraday trading.
A question now comes to mind. Then which technical indicator is best suited for intraday trading? Which technical indicator should I use for intraday trading?

And here's the answer to that question:

 And here's the answer to that question:

Before I give you the answer, try to understand why all those technical indicators failed you in intraday trading. Without finding an answer to that you can never find a solution that works for intraday.
The answer is, because all those indicators are using really old data to plot charts. Be it MACD, Bollinger bands, Stochastics, or RSI, they all used 14-20 days data for their calculations...
How can a month old prices give you a stock's movement for just today?
They sure can tell you the trend, but even in an uptrend, stocks don't move upwards in a straight line.

Two Technical Indicators that work in Intraday Trading!

 Two Technical Indicators that work in Intraday Trading!

So far we've seen that only Stochastics was somewhat able to catch the real movement, and went in over-bought zone as soon as the prices went up, but just reaching in over-bought zone is a misleading signal in itself, isn't it?
What if you take a sell call, but the stock makes a new high the next day?
We needed a faster and a much more accurate version of stochastics. This is called SuperFast Stochastics.

It uses only current day data to calculate over-bought and over-sold zones, and catches the movement in real-time.
Just like traditional stochastics, SuperFast Stochastics also follows all the rules like over-sold and over-bought zones.
The only difference is that levels are not 20-30 for over-sold and 70-80 for over-bought. SuperFast stochastics in intraday a stock can really hit zero or 100!
Look at SuperFast stochastics charts below. The small box in the top right corner.

However, there's still a problem.
We know the stock has hit 100 levels in SuperFast Stochastics. Does this mean that it'll come down from here?
Not at all. stock prices can keep rising, and SuperFast Stochastics line will keep moving horizontally at the 100 level, thus staying in the over-bought zone for GOD knows how long...
Then how do you decide when to sell? This is where MRSI comes in.

MRSI, MunafaSutra RSI

 MRSI, MunafaSutra RSI

MunafaSutra RSI, also known as MRSI, has nothing to do with RSI. Only the name is similar because MunafaSutra RSI is also a measure of Relative Strength.

MunafaSutra RSI, like traditional RSI, measures the gain in a stock, and compares it with gains or losses that follow.
As soon as there is a large gain, the MRSI histogram/line will cross into the positive, above zero zone.
Likewise, with a falling stock, the MRSI histogram/line will cross into the negative, below zero zone.
Look at these intraday charts below. Look in the black box at the right.

 MRSI chart for intraday

The green and red bars you see on the left are prices, plotted as a bar. The long line at the bottom is the price line of last traded price (LTP) for intraday.
The line you see in the black box is the MRSI line.
Notice how the line is moving below and above zero line?
As soon as MRSI line went into positive, above zero, look how the prices kept going up.

A buy signal is simply when MRSI line is in negative zone, and starts moving upwards.
Or is already in positive zone, but near zero line, and starts moving upwards

Likewise, a sell signal is when iMRSI is in positive zone, and crosses into negative zone.
Or, MRSI line is in positive zone, but close to over-bought (100, top of the box), and starts moving downwards.

All those are signalling a change in the trend.
Look at these charts. Same stock, just 2-3 days later.

 Second MRSI chart for intraday

Notice how in these second charts above, the SuperFast Stochastics line is pretty much in the over-bought zone for almost the entire day.
Also notice how MRSI line is moving upwards constantly, giving you information of the trend.
So the stock is in over-bought zone, but the trend is upwards. Hold it.

Its safe to conclude, that you cannot use just one technical indicator for intraday trading.
You need a combination of both SuperFast Stochastics, and MunafaSutra RSI (MRSI) for intraday trading.

The intraday charts used above are available:

I should also point out that MRSI can also be used to catch short-term trend change for positional trades, and even a longer duration trend reversal. Depends on the setting you use.
Below is a MunafaSutraRSI MRSI chart of the same stock, but for a short-term positional trade, as on 9 Jun, 2017.

 MRSI for short-term

Even this went into positive zone, and is suggesting that momentum will stay positive for a couple of days.
Below are MRSI charts for an even longer duration.

 MRSI for Long-term

This has not given any buy signals, so we are still bearish on this stock for a longer time frame.

To conclude, we need to use both MRSI, and SuperFast Stochastics as our technical indicators for intraday trading.
Both MunafaSutraRSI MRSI, and SuperFast Stochastics have proven to be the best technical indicators for intraday trading.
And MunafaSutraRSI MRSI is giving clear trend direction for even shorter and longer positional trades

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