5 key indicators to watch for short-term investment success
In the fast-paced world of short-term investing, it is probably not an understatement to say that one of the keys to success is an ability to comprehend the market trends and to act upon them quickly. This article identifies five key indicators that could vastly improve your chances of being successful in a short term investing strategy. Be it an amateur trader or a pro in trading activities, these indicators will prove to be a valuable asset in your trading journey.
Relative strength index (RSI)
Among the many indicators that traders rely on, the Relative Strength Index (RSI) is a momentum oscillator, a type of indicator that calculates the rate of decline and increase of a financial asset’s price. It has immense importance for short-term investors who wish to understand the potential overbought or oversold conditions in the market, in advance.
How to apply RSI:
- The value of the RSI ranges from 0-100
- A level over 70 suggests the asset may be overbought.
- Any level below 30 suggests the asset may be oversold.
However, most of the traders use the RSI indicator only as a display of potential areas of entry or exit points. E.g., upon the RSI level crossing above 30, as the RSI exits the oversold territory, it might signal a buying opportunity. Additionally, if the RSI level falls below 70, the price leaves the overbought territory, it could indicate a selling opportunity.
One should also consider that the RSI tends to work optimally when combined with other indicators and other forms of analysis. A majority of the traders that trade with the use of the MT4 Trading Platform Online, keep an eye on the RSI with other indicators.
Moving averages
Moving averages are one of the most prominent and popular used indicators in technical analysis. Through it, the multiple price information is simplified to a single continuous line, thus making it easy to see where the trend is headed.
Types of moving averages
- Simple moving average (SMA)
- Exponential moving average (EMA)
EMAs respond more quickly to recent price movements than the SMAs, and hence are more ideal for short-term trading strategies.
How to use moving averages:
- Crossovers: The most common use of a moving average is that, once a cross occurs where a shorter term moving average crosses above a longer term moving average, it’s often considered a bullish signal, and vice versa.
- Support and resistance: Moving averages behave not only as static zones, but as dynamic levels of support and resistance.
- Trend identification: The slope of the moving average curve gives a general hint on what direction the price is moving to.
It is a common practice among many skilled short-term investors, to use moving averages alongside with other indicators. An example of this would be where a trader uses RSI in order to look for overbought and oversold areas followed by a moving average crossover to confirm the trade signal before entering the market.
Volume
Volume is generally a fundamental but unappreciated metric in short-term investing. It is the number of shares or contracts that are being traded within the specific time frame and usually regards price actions.
Key volume signals:
- Price increase with volume expansion which signals an uptrend
- Price decrease with volume expansion which signals an downtrend
- Price changes with low volume indicate a lack of conviction and a possible reversal.
Volume takes an even more important utility when combined with price action. For example, a price breakout through a certain resistance level on its own may not mean much to most people, but accompanied by an increase in volume is generally regarded as more effective and sustainable than a breakout on low volume.
The MT4 Trading Platform Online possesses the additional advantage of enhanced volume analysis tools which makes it easy for traders to use volume data when making trading decisions.
Bollinger Bands
Bollinger Bands are indicators of market volatility depicted in three layers which consist of one simple moving average and two lines of standard deviation – one above and the other below the simple moving average.
How to use Bollinger bands:
- Volatility measure: The width of the bands indicates market volatility. Wide bands would indicate a volatile environment while narrow bands depict low volatility.
- Overbought/oversold conditions: If the assets are priced as close to the upper band, they may be overbought and if the assets are priced as close to the lower band they might be oversold.
- Breakouts: A strong market movement that exceeds both upper and lower bands strongly signals the continuation of the current trend.
Bollinger Bands are very popular tools among short-term traders because they continuously adapt to market changes. When the market is volatile the band widens, while it narrows during low volatility periods. This flexibility makes them a valuable ally to short-term traders.
MACD (moving average convergence divergence)
The MACD is a technical indicator that uses trend-following momentum for the purpose of gauging the relationship between two moving averages of an asset’s price.
Components of MACD:
- MACD Line: The difference between a 12-period and 26-period EMA
- Signal Line: A 9-period EMA of the MACD Line
- MACD Histogram: The difference between the MACD Line and the Signal Line
How to use MACD:
Crossovers: When the MACDline rises above the Signal line, this can be interpreted as a bullish signal and inversely when the MACD line moves down the Signal line.
Divergences: When the MACD diverges from the price action, it can signal potential reversals.
Histogram Analysis: The use of a MACD Histogram can be utilized in observing early changes in the direction of a trend.
As the MACD consists of both trend-following and momentum components, it provides great value to short-term traders by providing a comprehensive view of market dynamics.
Integrating indicators for comprehensive analysis
Though each of these indicators is useful on its own, the real strength of these elements comes from their integration. There are many, who believe that short-term investors can help avert losses by integrating different indicators for a more advanced and practical trading system.
For instance, a trader can:
- Use the moving averages to get the general direction of the market movement.
- Determine potential entry/exit points using the RSI.
- Look towards volume for confirmation of price movement.
- Use the Bollinger bands for volatility and possible reversal signals.
- Use the MACD indicators to identify momentum and potential entry or exit signals.
The MT4 Trading Platform Online provides an effective platform for application of these indicators as it creates room for the trader to view and analyze multiple indicators simultaneously.
Conclusion
Mastering these five key indicators can significantly improve the success probabilities of a short term investment performance. Nonetheless, it must be stated that there can be no perfect indicator and successful trading requires that different tools like technical, fundamental and sound risk management are combined.
Remember, successful investing is a journey of continuous learning and adaptation. Stay curious, remain disciplined, and always be prepared to refine your approach as market conditions evolve.
