Do you want to take a deep dive into the exciting world of momentum investing? There are many technical indicators available to scan stocks. It is difficult to understand all the indicators or follow them. Let us find out what are the 5 best technical indicators that can help in scanning momentum stocks.
With the stock market’s ups and downs, I’ve learned one thing the power of technical indicators in momentum trading. Traditionally, the technical indicators list is quite long. However, not all technical indicators are created equal. It is crucial to know which ones work best for momentum investors. That’s why today, I’m sharing the top 5 best technical indicators for momentum investment to kickstart trading or investment journey. These technical indicators can solve maximum problems while scanning stocks.
5 best technical indicators
Moving Averages of Stock Price
One of the best technical indicators is the moving average of stock price. While trading, we always discuss about price of the stock like the entry price, exit price, open price, and close price of a stock. The moving average determines the trend of the stock price. Within the moving average indicator, traders mainly look into the 50-day simple moving average (SMA) and 200-day SMA. The 50-day SMA is a simple average of the price of the last 50 trading days.
Explaining simply, if a stock is above 50-day SMA and 200-day SMA, the stock is considered in a bullish trend. This is one of the indicators that tells the trend of the stock. Once, the stock is below 50-day SMA, it may be considered a down trend in a short period. If the stock goes below the 200-day SMA, it may consider a downtrend for a long period.
There is another concept of golden crossover, where the 50-day SMA crosses over the 200-day SMA. This gives a view of the bullish trend. Other moving averages such as 21-day SMA can also be considered for short-period trade.
I used to consider the Exponential moving average (EMA) as one of the best indicators for short-term investment or momentum investment. I used to invest in a stock if it is above 50-day EMA and 200-day EMA provided other indicators give a bullish signal.
Relative Strength Index (RSI)
The Relative Strength Index (RSI), is the holy grail of momentum indicators. It measures the speed and change of price movements, helping you identify overbought or oversold conditions. An Relative Strength Index (RSI) value above 70 indicates overbought territory, which might suggest a pullback is on the horizon. Conversely, an RSI value below 30 points to an oversold condition, signaling a potential buying opportunity. It’s your go-to indicator for timing your trades in momentum stocks.
However, for momentum investing, RSI needs to be above 50. I always consider RSI (14) for momentum investing. I used to invest in the stock when monthly and weekly RSI was above 60 and daily RSI was above 40. This gives a bullish signal to invest in the stock provided other indicators satisfy the hypothesis.
If RSI (14) ranges between 40-80 the stock is in a bullish trend, if it is in a range of 60-80 the trend is strong. If RSI goes below 40, the stock is in a downtrend. This applies to stocks as well as indices.
Daily Trading Volume
For me, one of the best technical indicators is daily trading volume. I used to observe the trading volume for the last 100-day average. If the daily trading volume is in green and it is above the 100-day average for the last 4-5 trading sessions, then the stock has liquidity and traders are taking interest in the stock. This may be the perfect momentum investing stock provided other parameters are satisfied.
The above technical indicators list are best for me to identify stocks and follow up as a momentum investor. As a beginner, you can consider only the above indicators to get your investment multiplied. However, you can also observe the below indicators to support your hypothesis. Apart from the above indicators, you also need to look into fundamental analysis of the stocks before investing.
Moving Average Convergence Divergence (MACD)
Next up is the Moving Average Convergence Divergence, known as MACD. This indicator comprises two lines, the MACD line, and the signal line. When the MACD line crosses above the signal line, it’s a bullish signal, indicating that it’s time to go long. Conversely, when the MACD line crosses below the signal line, it’s a bearish signal, suggesting it might be time to sell or short a stock. MACD is your trusty companion for catching momentum shifts in the market.
Average Directional Index (ADX)
The Average Directional Index (ADX) is your best friend when it comes to gauging the strength of a trend. It doesn’t provide you with the direction of the trend but lets you know how strong it is. If the ADX is rising, the trend is getting stronger, and that’s your cue to hop on the momentum train.
Below two indicators below are additional to support your analysis. However, if you practice chart with technical indicators list, you can only observe the above 5 indicators that is good enough as a momentum investor.
Another technical indicator that I used to keep an eye on is Super Trend. There is no need to go deep into this indicator. Apart from the above indicators, just observe if the stock is above the super trend line. If the stock price is above the super trend line, it is in a bullish trend, and vice versa.
This is a bonus indicator that you may look for trading. We have the classic Bollinger Bands. These consist of a middle band (usually a 20-period simple moving average) and two outer bands. The outer bands expand and contract based on price volatility. When the price hits the upper band, it might be overextended, indicating a potential reversal. Conversely, when it hits the lower band, it could be a sign that the stock is oversold and ready for a bounce.
In the world of momentum investing, out of technical indicators list these five technical indicators are like your trusty compass, helping you navigate the stock market’s treacherous waters. Remember, while 5 best technical indicators are powerful tools, they’re not infallible. Always conduct thorough research and use them in conjunction with other analysis methods.
Remember that experience and practice are your best teachers in the stock market. The more you look for the charts, the better you will be with your experience. So, dive in, test these indicators, and most importantly, don’t be discouraged by losses. They’re an integral part of the learning process. Happy trading, and may the momentum be with you!
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