Intraday trading is a technique that requires traders to initiate and exit their positions on the same trading day. Intraday traders monitor the markets constantly to exploit potential profit areas. However, it can be challenging for traders to assess suitable entry and exit points to make profits. Technical analysis helps traders analyse market trends, find the correct entry and exit points, and make efficient trading decisions.
What Is Technical Analysis?
Technical analysis studies markets, trends, price volume and other factors to generate calculated trading signals. Technical analysis typically uses historical data to predict future market behaviour. It plays a vital role in intraday trading since intraday trades run through a very narrow profit-making window and traders want to make the most out of it. Most technical analysis is based on analysing current market trends and understanding whether the trend will continue. Technical analysts use various tools, such as trendlines, candlestick patterns, etc. to analyse and assess price trends. Most traders may use a combination of various indicators to understand future price trends. Traders must ensure they know the basics of the stock market, such as Demat account meaning, Demat charges, trading account significance etc., before understanding technical analysis and intraday trading strategies.
Assumptions of Technical Analysis in Intraday Trading
Technical analysis in day trading is based on the following assumptions:
- The Market Discounts Everything - Technical analysis assumes that the current price reflects all the information relating to the specific security. The information may or may not be available publicly. However, according to the assumption, stock prices at any time reflect everything that has or can influence the company.
- Values Move in Trends - Technical analysis assumes that traders can predict future price movements by looking at historical patterns for security.
- History Repeats Itself - The final assumption in intraday trading is that history tends to repeat itself, and traders can use past examples to comprehend future price patterns.
Understanding Technical Analysis for Intraday Trading
Intraday trading meaning is when trades are executed during the course of a single trading day. This is done by examining technical chart patterns constantly to evaluate future price movements. Here is a detailed overview of the critical points traders must understand while seeking to implement technical analysis for intraday trading.
- Tools of Technical Analysis - Let us understand the primary tools that go into technical analysis.
|
Technical Analysis Tool
|
Implementation
|
|
Charts
|
Volume charts are among the most widely used tools for technical analysis. Candlesticks are the most popularly used charts. Other chart patterns comprise line and bar charts. The charts are typically used in tandem with trendlines to analyse market trends.
|
|
Momentum Indicators
|
Momentum indicators act as supporting tools for charts. These figures are derived using the chart’s price and volume data. These indicators are extensively used to confirm traders’ views on stocks. .
|
|
Moving Averages
|
Moving averages help traders stay focused by eliminating sudden price movements that may influence their decision. The moving average removes the impact of such spikes or pitfalls and makes the current trend more prominent for the trader.
|
Technical indicators - When used on charts, technical indicators generate mathematical signals for traders to make the most out of an opportunity. Let us understand some of the most critical indicators in detail.
|
Technical indicator
|
Implementation
|
|
RSI Indicator
|
The Relative Strength Index (RSI) serves as a momentum indicator and helps traders understand a particular stock's momentum and market movement. The RSI is depicted by a straight line that ranges between 0 - 100. RSI values above 70 might indicate an overbought situation, and below 30 may imply an oversold market.
|
|
MACD
|
Moving Average Convergence Divergence (MACD) is a popular trend-following indicator used extensively by intraday traders. The MACD comprises the difference between the moving averages for two different periods. The values are typically 26-period Exponential Moving Average (EMA) and 12-period EMA. This constitutes the MACD line. The signal line is formed at 9-period EMA. When MACD crosses the signal line from above, the trend is bearish.
|
|
Bollinger Bands
|
Bollinger bands are a popular volatility indicator used by intraday traders. The bands widen during high volatility and narrow down when the markets are less volatile. The bands comprise a simple moving average, with two bands plotted on either side. Securities trading above the upper band may likely take a dip, and those below the lower band may witness a spike.
|
Traders use various other indicators for technical analysis, such as the Average Directional Moving Index (ADX), Fibonacci Retracement, etc.
- Best Combination of Technical Indicators - Technical indicators comprise trend, momentum and volatility indicators. While using a combination of technical indicators, traders must select indicators that belong to different categories. Using the same category indicators can generate identical results, and the signal may only sometimes be correct.
Conclusion
Technical analysis uses various tools and indicators that can help investors predict future price movements more efficiently and maximise their returns. A combination of multiple indicators can help generate powerful insight into suitable entry and exit points, facilitating better decisions.