For the indicators we have discussed earlier, let us now tackle on a deeper level where we could see the buy and sell signals. I already will plot the buy and sell points through the colored dots or points you will see in the chart. The blue points are buy signals, and the green points are sell signals.
First, the Relative Strength Index indicator. The general rule of thumb would be to buy at 30-levels and sell at 70-levels. This is because the stock which is oversold would potentially mean that it is ready to go up again.
Let us look at this example for RSI. I have pulled up the charting for AAPL, in a 15-min timeframe.
In day trading, you could enter as many positions as you want. Just determine your exit points. As you can see, we don’t have to be very strict that the RSI should meet the 30-levels before we could enter the buy. There are dips that you could already enter then wait until it went up the 70-levels. With the plotted buy and sell points, look at how they were positioned in parallel to the RSI indicator. From that alone, you may be able to set your buy positions and wait for the upward trend and sell once it reached your desired target profit.
Next, is the Moving Average Convergence Divergence. The MACD line is the blue line, and the signal line is the red line. Again, the general rule of thumb for MACD is that when the MACD line crosses below the signal line, it signifies a bearish trend. A bullish trend is signaled when the MACD line crosses above the signal line. Let us now look at the MACD interpretation of the same AAPL stock.
From this example, place a buy trade when the MACD line is above the signal line. Then sell before they cross over again for a bearish trend. Generally, we don’t place a buy trend when the MACD line is still below the signal line. It is because most of the time, the stock price is still consolidating or rallying, and we should wait for further price correction before we see an uptrend movement.
The last indicator that we will discuss, is the Bollinger Bands. Using the same stock and timeframe, we will see how we could use it to identify our trades. The general rule of thumb would be to buy when the Bollinger bands are narrow, and sell when it is wide. Using this indicator is kind of a bit hard because when the bands are narrow, there are lots of prices that you could enter and if you’re the type that would want to maximize profits, you might be placing your buy at a slightly higher price. The same with the selling signal. Since the bands are wide, there is no definite selling point that you could consider as an exit point. You kind of just place them while the volatility is raging.
There is also a disadvantage that you could see in the chart. The black point is in the narrow band and when the stock entered into a wider band, the stock price plummets. This is what would be one of the risks that you would need to assess in case it happens while you are trading, do you cut loss and enter again at a buying price, or wait for it to consolidate and sell at a higher price?
I know that you must be feeling ecstatic about being able to learn and master some of the best indicators day traders use, but again, be reminded that these indicators are not 100% accurate, and even if you do your due diligence in taking some time to research about a specific stock, there is still a slight chance that the market will go opposite your way.
How do we combat this negative probability? Actually, we cannot rule out the probability that some of our trades will fail. That is why these indicators, as much as they would help you maximize your profit, will lessen your risk exposure, and align your mind to decide objectively while being in the market.
To increase your probability of winning in your trades, it is recommended that you only use two to three indicators. The more indicators you pull up in your chart, the more confusing it will be to analyze. This is where the quote “Less is more” is actually applicable. Start by using these three, then proceed in doing your analysis.
I may have iterated it a lot already but as much as day trading heavily relies on the technical analysis, do consider looking at the stocks’ fundamentals. It will also help you get grounded, and you could maximize the stocks’ potential especially if there are recent company disclosures.
Now, let us try analyzing the AAPL stock in its 15-minute time frame. We will combine the three indicators, then plot out the buy and sell points that we’ll enter.
From previous slides, there are multiple buying and selling points we could do from using one indicator alone. Meanwhile, when we combine the three indicators, we will be able to deduce the common buy price and its common selling price. In that way, it minimizes our risk of loss while securing greater profits.
This charting tells us that the lowest price we could enter a trade for the APPL stock is 119 USD, and the highest price we could sell it while still in the upward trend would be at 123 USD.
This is just an example, all right? You could do some scaling out if you want to as well when you are trading. It all really depends on each trader’s strategies on how they would carry out the trade.
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