1. Moving average
I know, moving averages are so basic right? Literally everyone uses it and I’m sure even you have used it in trading.
But, I have not included moving averages in this top 5 list just for nothing.
So, moving averages are great indicators that allows us traders to know the trend right. If it is sloping up, we’re in an uptrend. If it is sloping down, we’re in a downtrend. If it is flat, price is ranging.
That’s the basic use of moving averages. But, what if there was another way to use this indicator? A method that would give you much more information.
Look at this chart here. You’ll see that there are two moving averages applied and let me tell you that both are of the same length. Then, why are they different?
That’s because the yellow moving average is of the Daily timeframe and the black moving average is of the Weekly timeframe.
Now, using a moving average of a higher timeframe can actually help you a lot once you figure out how to use it, and once you build a strategy around it.
And that’s why, moving averages of different timeframe, is on my top 5 trading indicators list.
VWAP stands for Volume Weighted Average Price and it is another trading indicator that you should consider using.
Now, what does this indicator do? It combines price, volume traded, gives you an average that is plotted on the chart as a line.
When you add the VWAP on the chart, it looks something like this.
So the middle is the actually VWAP line and the upper and lower lines are actually calculated by including standard deviation and that’s how we get a complete band.
Do you also notice that the lines reset as the new trading day begins? That’s because with each trading day, fresh trading volume begins and that’s why it looks like that.
So, how to trade this? Well, lucky for you, I already made a strategy around this indicator and I’d really just that you have a look at it.
You’ll get a decent understand as to how it works and maybe you can come up with your tweaks and build a completely new strategy around this VWAP indicator.
3. Bollinger bands
If we’re talking about top 5 trading indicators then Bollinger bands are always going to be included in the list. It’s that good an indicator.
So Bollinger bands consists of a 20 period moving average and to this, standard deviation is applied and it gives us an upper band and a lower band.
Now, what’s so special about Bollinger bands? It shows you the volatility and momentum in the market and it adjusts itself according to those conditions.
This is how the Bollinger band indicator looks like when you apply it on the chart.
The yellow line in between is the 20 period moving average and the blue lines above and below it are the upper and lower bands.
Notice two things with this indicator, firstly see how the price is most of the times inside the upper and lower band, and secondly, see how the upper and lower bands contract and expand as the price moves.
This is the very thing that trades use to build their trading strategies using the Bollinger bands indicator.
MACD stands for Moving Average Convergence and Divergence. I’m sure you would have read about this indictor a lot and might have used it too.
So the MACD indicator shows us strength in price movements and it can indicate when the price is over stretched and when a reversal is imminent.
This is how the indicator looks when it is applied on the chart.
The MACD indicator shows us a relationship between the moving averages of the price and as you can see in the chart, it oscillates between two extreme points.
Observe one more thing, the histograms in the middle. These histograms change from green to red, and this shows bullish and bearish movements.
Now, there are many ways to use the MACD indicator but I want to show a different way to use this.
I have used the histograms as well as the moving averages of the MACD indicator to plot swing highs and lows of the price and look at how accurate it seems to be.
I found this concept very intriguing and that’s why I have added this indicator to my top 5 list.
RSI stands for Relative Strength Index and it is the best ever trading indicator in my opinion.
It is an oscillator just like the MACD and its value moves between two extremes.
This is how the RSI looks when it is applied to the chart.
Many people use this indicator to trade overbought and oversold levels but I don’t really like using it for that purpose.
The best method to use this indicator in trading is to trade the divergences that occur between the RSI and the price. You literally have an entire strategy around this concept and it is more than enough.
You can trade divergences on any timeframe, but yes, the higher the better.
I have seen traders take entries based on the divergence concept while I have also seen traders that look out for divergences to know where they need to square off their already open trade.
Either way works, but I wanted to include this indicator in my top 5 list due to its versatility and flexibility.