7 Technical Indicators to Build a Trading Toolkit

Technical indicators are used by traders to gain insight into the supply and demand of securities and market psychology. Together, these indicators form the basis of technical analysis. Metrics, such as trading volume, provide clues as to whether a price move will continue. In this way, indicators can be used to generate buy and sell signals.
Seven of the best indicators for day trading are:

• On-balance volume (OBV)
• Accumulation/distribution (A/D) line
• Average directional index
• Aroon oscillator
• Moving average convergence divergence (MACD)
• Relative strength index (RSI)
• Stochastic oscillator

You don't need to use all of them, rather pick a few that you find helpful in making better trading decisions. Learn more about how these indicators work and how they can help you day trade successfully.

KEY TAKEAWAYS

• Technical traders and chartists have a wide variety of indicators, patterns, and oscillators in their toolkit to generate signals.
• Some of these consider price history, others look at trading volume, and yet others are momentum indicators. Often, these are used in tandem or combination with one another.
• Here, we look at seven top tools market technicians employ, and that you should become familiar with if you plan to trade based on technical analysis.
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Tools of the Trade

The tools of the trade for day traders and technical analysts consist of charting tools that generate signals to buy or sell, or which indicate trends or patterns in the market. Broadly speaking, there are two basic types of technical indicators:

1. Overlays: Technical indicators that use the same scale as prices are plotted over the top of the prices on a stock chart. Examples include moving averages and Bollinger Bands® or Fibonacci lines.
2. Oscillators: Rather than being overlaid on a price chart, technical indicators that oscillate between a local minimum and maximum are plotted above or below a price chart. Examples include the stochastic oscillator, MACD, or RSI. It will mainly be these second kind of technical indicators that we consider in this article.

Traders often use several different technical indicators in tandem when analyzing a security. With literally thousands of different options, traders must choose the indicators that work best for them and familiarize themselves with how they work.
They may also combine technical indicators with more subjective forms of technical analysis, such as looking at chart patterns, to come up with trade ideas. Technical indicators can also be incorporated into automated trading systems given their quantitative nature.

1. On-Balance Volume

Use the on-balance volume to measure the positive and negative flow of volume in a security over time. The indicator is a running total of up volume minus down volume. Up volume is how much volume there is on a day when the price rallies. Down volume is the volume on a day when the price falls. Each day volume is added or subtracted from the indicator based on whether the price went higher or lower.
When OBV rises, it shows that buyers will step in and push the price higher. When OBV falls, the selling volume outpaces the buying volume, which indicates lower prices.1 In this way, it acts like a trend confirmation tool. If price and OBV are rising, that helps indicate a continuation of the trend.
Traders who use OBV also watch for divergence. This occurs when the indicator and price are going in different directions. If the price is rising but OBV is falling, that could indicate that the trend is not backed by strong buyers and could soon reverse.

2. Accumulation/Distribution Line

One of the most commonly used indicators to determine the money flow in and out of a security is the accumulation/distribution line.
Similar to OBV, this indicator also accounts for the trading range for the period and where the close is in relation to that range in addition to the closing price of the security for the period.2 If a stock finishes near its high, the indicator gives volume more weight than if it closes near the midpoint of its range. The different calculations mean that OBV will work better in some cases and A/D will work better in others.
If the indicator line trends up, it shows buying interest, since the stock closes above the halfway point of the range. This helps confirm an uptrend. On the other hand, if A/D falls, that means the price is finishing in the lower portion of its daily range, and thus volume is considered negative. This helps confirm a downtrend. 
Traders using the A/D line also watch for divergence. If the A/D starts falling while the price rises, this signals that the trend is in trouble and could reverse. Similarly, if the price trends lower and A/D starts rising, that could signal higher prices to come.

3. Average Directional Index

The average directional index is a trend indicator used to measure the strength and momentum of a trend. When the ADX is above 40, the trend is considered to have a lot of directional strength, either up or down, depending on the direction the price is moving.3
When the ADX indicator is below 20, the trend is considered to be weak or non-trending.
The ADX is the main line on the indicator, usually colored black. There are two additional lines that can be optionally shown. These are DI+ and DI-. These lines are often colored red and green, respectively. All three lines work together to show the direction of the trend as well as the momentum of the trend.

• ADX above 20 and DI+ above DI-. That's an uptrend.
• ADX above 20 and DI- above DI+. That's a downtrend.
• ADX below 20 is a weak trend or ranging period, often associated with the DI- and DI+ rapidly crisscrossing each other.