To maximize profits and minimize losses, traders must find the best entry and exit indicators. These are the optimal points to initiate and close a position on a particular asset. Timing is everything — by finding the best trading indicators, you’ll be able to trade more effectively.
This guide will help you understand how trading indicators work and how to select the best indicators when planning your entry and exit points.
How Trading Indicators Work
First, it’s important to remember that while investing and trading both rely on the stock market, they’re based on vastly different strategies. While investors are focused on taking a long position and growing their money over time, traders are more interested in short positions (sometimes as little as a few hours) to generate quick profits.
Trading indicators determine the optimal time for a trader to initiate (or close) a position. “Entry” points can involve the purchase or sale of a stock, while an “exit” point is the price at which a trader will close their position. These entry/exit points are carefully researched to minimize risk, optimize profits, or cut losses of underperforming assets.
Perhaps more importantly, trading indicators help traders make decisions based on data instead of going with their gut instincts. Trading indicators take emotion out of the equation so you can make objective, well-informed financial decisions.
The Best Entry and Exit Indicators for Traders
What are the best indicators for entry and exit positions? Here are some of the most important indicators stock traders should learn.
It’s worth noting that while TradingView indicators include some proprietary metrics, the following list is appropriate for traders on any platform.
Moving Averages
A moving average calculates the average price of an underlying asset over a given period. The goal is to filter out the price fluctuations created by market volatility and identify a clear trend — that is, whether the asset is moving up or down.
Moving averages can be expressed in several distinct ways:
- Simple Moving Averages: Rely on a basic arithmetic mean
- Exponential Moving Averages: Place more weight on recent price data
- Weighted Moving Averages: Place diminishing weight on recent price data
- Double/Triple Exponential Moving Averages: Uses layered analysis to reduce lag
Traders can also use moving averages to identify “support” and “resistance” levels, which are the upper and lower limits of an asset’s price. When the price exceeds these levels, it can indicate that it’s time to make a trading decision. So when an asset’s price rises above the moving average price, it’s likely a good time to sell for a profit.
While moving averages are simple, they have one major drawback. Specifically, they’re based on historical data, which may or may not reflect the stock’s future.
Bollinger Bands
Bollinger bands help traders understand the relationship between volatility and price levels based on previous performance. Bollinger bands consist of three lines:
- Middle Band: The simple moving average of the stock
- Upper Band: An upper level that it’s believed the stock won’t exceed
- Lower Band: A lower level at which the price is considered low
To calculate the upper band, traders usually use a number that’s two standard deviations from the middle band. The lower band simply subtracts this same number from the middle band.
Thus, these bands form the support and resistance levels for the asset. When prices cross the middle band (the moving average), it can indicate that it’s time to make a trading decision, depending on which side of the trendline the price falls on.
Stochastic Oscillator
A stochastic oscillator is a form of technical analysis that identifies momentum in the market and can also indicate when stocks are overbought or oversold. The value is always between 0 and 100. Readings of 80 or above typically indicate oversold conditions, while readings of 20 or below indicate oversold conditions.
To make a calculation, traders subtract the low price of a given period from its current closing value. Then, they divide this number by the total range from the period and multiply by 100 to get a number between 0 and 100.
For example, imagine that you’re calculating the stochastic oscillator for a two-week period. Assuming the 14-day high is 175, the low is 125, and the current close is 150, you could calculate the stochastic oscillator as follows:
Stochastic oscillator = (closing value – low price) / (high price – low price) x 100
Stochastic oscillator = (150 – 125) / (175 – 125) x 100
Stochastic oscillator = 25 / 50 x 100
Thus, the value comes out to 50.
When represented graphically, the stochastic oscillator can point to a potential price reversal. If a bearish trend reaches a lower low than the oscillator indicates, it could foreshadow a bullish reversal.
Moving Average Convergence/Divergence Indicator (MACD)
Traders also use the Moving Average Convergence/Divergence (MACD) indicator to determine the relationship between two exponential moving averages (EMA) of a stock’s price. The MACD includes three components:
- MACD Line: Made by subtracting the 26-period EMA from the 12-period EMA
- Signal Line: The nine-period EMA of the MACD line itself
- MACD Histogram: The difference between the MACD line and the signal line
Traders look at the way the MACD line and signal line intersect. If the MACD passes above the signal line, it indicates a bullish signal. When it passes below the signal line, it’s considered a bearish signal.
Relative Strength Index (RSI)
Like the stochastic oscillator, the relative strength index (RSI) is another momentum indicator that shows the speed and magnitude of an asset’s most recent price movements. Traders can use the RSI to determine bought and sold conditions.
The RSI is a line graph on a scale of 0 to 100. When the asset is over 70, it’s considered overbought; when it drops below 30, it’s considered oversold. Crossing the overbought or oversold lines indicates that it’s a good time to buy or sell.
Traders can also use the RSI to identify future price reversals. If the RSI reaches a new low (lower than previous data) and the asset reaches a low that’s higher than its previous low, it can indicate a positive reversal. Likewise, if the RSI reaches a new high and the asset reaches a lower high, it can indicate a bearish reversal.
Tips for Traders
Trading isn’t for everyone, and it comes with greater risk than taking a long position in the stock market. That said, if you decide to pursue trading, here are some tips to help you manage risk and maximize your gains.
Practice Making Paper Trades
Even the best entry and exit indicators can be challenging for beginners. Get used to making paper trades in a stock simulator until you learn the mechanics of trading. You can then graduate to real trades once you understand how to use technical indicators in your investment.
Follow the 1% Rule
Even experienced traders can use the 1% rule to manage risk. This rule simply says you should never invest more than 1% of your total trading budget in a single trade. If things work out, you can always invest more in the future. If the trade performs poorly, you won’t have risked everything.
Keep a Journal
Keeping a trading journal helps you learn. Write down your decisions, then check back later to remind yourself what worked — and what mistakes you don’t want to repeat.
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