Top 5 Day Trading Indicators. Best Indicator For Scalping Crypto

Technical indicators are auxiliary tools for technical analysis. Essentially, they are algorithms that calculate and display different technical aspects of an asset's price movement. Some of the most popular indicators include the Moving Average (MA), Moving Average Convergence/Divergence (MACD), Volumes, Bollinger Bands, and Relative Strength Index (RSI). Traders use indicators to assess the market and validate a potential entry point.

However, the use of indicators in scalping is largely misunderstood. In this article, we will shed some definitive light on the use of indicators in scalping. We’ll explain why scalpers don’t use indicators, why they sometimes do, and which ones they usually go for.
Attention! This article is for informational purposes only and does not contain recommendations or calls to action.

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An indicator is not what it seems

Technical indicators are analytical tools, but also marketing tools. Historically, they were made by experienced traders with in-depth knowledge of mathematics as well as trading psychology. Almost every known indicator started out as an exclusive product sold to large investors and institutional traders.

Before the internet, indicators remained exclusive to institutional investors. Deep pockets have always always been on the lookout for all kinds of gimmicks that might increase their success rate. The creators of indicators have also exploited this.
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These days, TradingView and virtually any other charting tool offer a long list of indicators originally marketed to have a “97% win rate”. Until fairly recently, many of these tools would have cost $10,000 or more. So why are they all free?

Indicators = Holy Grail?

The neverending quest for the Holy Grail has only lined the pockets of marketers, bloggers, YouTubers, and trading coaches. The simple desire to know the ultimate secret has spawned an entire industry. It includes an army of content creators who are happy to join the bandwagon, hyping up the next best indicator, the next best trading course, and providing little to no proof of tangible results. To put it simply, in most cases, chasing indicators is not worth the candle.

Indicators are individual

That’s not to say that technical indicators are useless. One can confirm or disprove a market hypothesis fairly reliably using a couple of indicators. But there is a caveat: indicators always espouse a certain view of the market, a mathematical perspective that their creators had in mind.
top day trading indicators, best indicator for scalping crypto
Bollinger Bands Calculation Formula
If you decide to use a trading indicator, you have to:
  • understand why you need it;
  • figure out how it’s calculated;
  • test the indicator for yourself.

If it fits your strategy and view of the market, then it might prove a handy tool. If not, then using this indicator is no better than gambling.

Indicators live in the past

Loading up an indicator feels good: its precise, smooth lines perfectly follow candlestick trends. It makes you feel like you finally understand the market. This feeling can get overwhelming enough for you to jump into a trade at the next intersection of the two curves. After all, the market always seems to go up when that happens. And that’s exactly what you must never do.
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Yes, indicators are divided into leading and lagging, but they all end up displaying historical data. Even leading indicators do not see the future. Their readings are averaged and adjusted to the present moment, creating the illusion of clarity.

What is the best indicator for scalping?

Scalping is not about indicators, but if we have to talk about it, indicators are only applicable in ~10% of cases. Almost all scalpers agree on one thing: indicators are by and largely useless for this type of trading.

Boiled down, scalping means trading without indicators. The reasons, apart from those described above, are:

  • With the skill to read the order book, clusters, and the tape, there is no need for other entry factors.
  • Indicators are calculated with formulas, and their readings are shown with a delay. In scalping, every second counts, and this comes out to a net negative.
  • Scalping timeframes – M1/M5/M15 – are not applicable to most trading indicators. Indicators need timeframes from H1 to show more or less reliable data without too much noise.
  • Scalpers strive for clarity and simplicity. Indicators are built on obtuse formulas, false or blurry data, etc.
  • Indicators often contradict each other. Go figure which one is right and which one is noise. Again, a waste of precious time.
  • Scalpers look at the market through a microscope. You don’t bring binoculars to a lab.

That said, beginner scalpers can still benefit from indicators. At an early stage, they allow you to gain a feel of the market and see it from a different angle. Ultimately, if you develop as a professional, indicators open your eyes to why you don’t need them. The ability to separate the wheat from the chaff is also a sign of professionalism.

How to use indicators in scalping

The bottom line is: for beginners and developing scalpers, indicators can and sometimes should be used — but only combined with other analysis tools. They should never be viewed as a guide to action. In fact, they should be used last, if at all.

Technical indicators in scalping should only be considered when the entry reason has already been formed. All indicators regularly generate false signals — in order to recognize them, you need to pay attention to price action and other factors (volume, etc.). First, you need to flesh out an entry point using three key scalping factors — the order book, the tape, and clusters. Then you analyze volume, and only as an aside, check the indicator you find interesting.

The best indicators for scalping and day trading

Trading volume

Volume is the only indicator that is worth a scalper’s while — hence its place in the CScalp terminal. Volume shows the actual amount of an asset in lots that has been traded on the last candle. Each tick of the histogram is formed immediately after the close of the last candle, and is colored after it. Volume calculation is simple: it’s the sum of lots for the selected time frame. This makes it the most responsive and reliable indicator for scalping.
top day trading indicators, best indicator for scalping crypto
Volume indicator (bottom) in the CScalp terminal
Volume reflects market activity, which can help you spot whales and foresee a trend. In scalping, the volume indicator is used as one of the key criteria for the strength of a level: if volumes increase at each touch of the level, then the level is strong (and vice versa). High volumes near levels always portend some kind of strong impulse movement. Large volumes dumped on the market result in a liquidity surge, and if the resistance is not strong enough, they often signify a breakdown. The volume indicator displays the actual balance of supply and demand in the market, exposing the current moods of the participants. That’s why the volume indicator is the only one truly indispensable for scalping.

The Relative Strength Indicator (RSI)

What is the Relative Strength Indicator (RSI)

The Relative Strength Index is one of the simplest and most popular technical indicators. More often than not, the RSI indicator is used in swing trading and mid-term trading.
top day trading indicators, best indicator for scalping crypto

The RSI indicator in the TradingView interface

The ultimate goal of RSI is to show whether the market is overbought or oversold. It helps traders determine the market trend and find potential reversal points.
top day trading indicators, best indicator for scalping crypto

RSI oscillator: red shows the moments of crossing level 30, and green shows the subsequent price growth

Visually, the RSI is formed as a line resembling a small copy of the chart. In most terminals, the indicator is placed under the main chart of a trading instrument (candles, bars, lines).

How to set up the RSI

To properly set up the RSI, you need to understand how RSI periods work. The period (RSI length) is the number of trading periods (candles) the indicator collects data from. Length 14 means that the index will look at the past 14 candles, length 10 – past ten candles, and so on. The ideal length is considered to be 14, but scalpers are better off experimenting with lower amounts. The developer of the indicator, Wells Wilder, recommended 14 as the optimal setting, but it’s worth noting that he wasn’t a scalper.

The RSI indicator uses information averaging. The more data, the more accurate the derived average. However, setting the length too high is not recommended – too old candles grow irrelevant and can degrade the indicator’s readings.
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The RSI indicator settings window in the TradingView terminal

How to use the RSI

To understand how to use the RSI indicator, you need to take into account that RSI is an oscillator, i.e. a line fluctuating between upper and lower boundaries.
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The RSI indicator in the TradingView interface

The relative strength index is placed in the space outlined by levels 0 – 100. Zero is a concentrated bearish value – the maximum oversold signal. 100 is a purely bullish value, maximum overbought.

Levels 30 and 70 are of key importance in trading: that’s where the oversold and overbought zones start. In theory, if the RSI line crosses 30 from top to bottom, you can expect a rally. If it crosses 70 from the bottom up, a sell-off is afoot. The viability of these signals largely depends on your choice of timeframe.

Stochastic and Oscillator RSI

RSI indicates only the prevailing direction of candles in the previous time period, which cannot guarantee viable trading signals. The instrument needs to look at more data – and that’s why Stochastic RSI was developed.
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Stochastic RSI

StochRSI looks like two oscillating lines intertwined with each other. The overbought and oversold boundaries are narrowed here. Instead of 30 and 70 as in the standard RSI, the Stochastic corridor is set between 20 and 80. Traders look for a signal when both instrument lines cross the boundaries of 20 or 80. Together with the regular RSI, StochRSI can help a trader filter off the noise and ‘sync the clock’ on a potential entry point.

RSI Divergence and Convergence

RSI Divergence is the visible divergence of the candlestick trend and the indicator. Such divergence can be viewed as a ‘slingshot’ for the next price movement. The longer the price goes against the direction of the RSI chart, the more certain the RSI signal becomes.
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An example of a divergence in the RSI, a signal for the price to fall

In the screenshot above, the local candlestick trend is going up while RSI says that the trend is down. In this case, we should prepare for a bearish trend (and vice versa).
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Crossing level 70 downwards by the indicator

Divergence can also signal a trend reversal. In this case, the candle chart points to a downtrend, while the lows on the RSI line are clearly rising. This may indicate a bullish period afoot. Unlike other types of indicator readings, RSI divergence per se can be taken as a signal to open or close a position.
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Convergence example. The trend defined on the chart corresponds to the signal from the RSI RSI

RSI Convergence is when the signals from the indicator follow the current candlestick trend. Most of the time, the indicator and the candle chart are in convergence. This is where you typically deploy some of the strategies explained below.

Common RSI indicator strategies

The classic RSI strategy is to buy when the line bounces off the 50 mark or passes it from below. Another standard trading pattern is to buy when the line crosses the 30 mark from top to bottom. You can sell when the line crosses the mark 70 from the bottom up — or open a short position at RSI 70 and then close it at a profit once it hits 30.

The caveat is that the amount of time it will take the RSI to move from one border to another can never really be predicted. It could be hours or even days before that happens. Whether you’re trading intraday or mid-term, you need to carefully choose what timeframe you’re using the RSI on. Moreover, the indicator may generate a lot of false signals, only approaching the desired mark but never quite hitting it. This may result in false analysis and erratic decision-making.
top day trading indicators, best indicator for scalping crypto

An example of a buy signal after crossing level 30

The Moving Average (MA)

What is a Moving Average (MA)

MA is the average price of an asset over a specific period of time. An MA looks like a curved line following price movements. It is used for the convenience of price analysis. The moving average is a lagging indicator, and is most applicable to day trading and swing trading; not so much for scalping.

Types of moving averages

There are several types of MAs: simple moving average (SMA), exponential moving average (EMA), weighted moving average (WMA), and other derivatives. MAs are used to determine the current trend by averaging sharp price fluctuations (market noise). The indicator slides along the chart, smoothing out the price profile.

Simple Moving Average (SMA)

The simple moving average does not show exact changes on the chart due to the over-generalization of the data.
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This is because each price value in the formula is applied with the same priority of significance. To obtain more correct data, more priority is given to the latest prices. For this, the EMA is used.

Exponential Moving Average (EMA)

An exponential moving average is used to give more priority to recent price data, allowing for more accurate readings. Sharp price changes are not taken into account.
EMA is much more sensitive than SMA. Therefore, if used incorrectly, it can give more false signals, especially when misconfigured.
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Moving Average Convergence/Divergence (MACD)

The Moving Average Convergence/Divergence (MACD) indicator

helps predict price movement based on the relationship between two moving averages.
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MACD consists of three components:
  1. MACD line. This is the difference between EMA with a period of 12 and EMA with a period of 26. It is faster and more sensitive to market changes. Shown in blue.
  2. EMA, period 9. The line is designed to generate the main signals. Brown on the chart.
  3. Bar chart. Shows the difference between the two previous curves. It is displayed as red and green bars, depending on the location relative to the zero mark.
It can be useful to look for divergences on the MACD chart as a way of reinforcing your theory. The most practical signal for scalpers and day traders would be a divergence between the main candlestick chart and the MACD. Such a divergence most often precedes a definitive price movement or a reversal of the current trend.
top day trading indicators, best indicator for scalping crypto
Still, MACD is a lagging indicator, and more often than not it adds complexity rather than clarity to a scalper’s workflow.

Bollinger Bands

Bollinger Bands are composed of three SMAs:
  1. The middle line, SMA 20, characterizes the main price direction.
  2. The upper line is the same SMA 20 shifted 2 standard deviations (STD) forward.
  3. The bottom line is shifted 2 standard deviations (STD) back.
Using the 3 moving averages, the bands aim to visualize the ongoing volatility. The range usually tightens in anticipation of a strong movement. During a strong move, the bands expand and remain so as the trend goes on. Towards the end of a move, they tend to ‘deflate’ and become tighter again, signifying an upcoming flat or correction.
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Most of the time, the price action is contained within the upper and lower bands. However, looking at the historical performance, one might notice that sometimes the price breaks beyond the bands, much like a needle piercing a balloon. Usually, this happens at pivotal points that precede strong, definitive movements. These breaches of the Bollinger bands by the price are considered buy and sell signals. When the price breaks through the lower band, traders consider buying, when it pushes above the upper range – selling. However, this rule is not universal. It depends on the overall price action and other parameters.

The Bollinger Bands indicator is best used in conjunction with Stoch RSI or MACD to substantiate your positions:
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Together with the MACD divergence, Bollinger Bands can generate fairly reliable buy/sell signals.

Even though Bollinger bands provide helpful data points, it’s still a lagging indicator that is redrawn as soon as fresh data comes in, undermining the positions you took using this indicator alone.

Conclusion

In this article, we have voiced the position of the CScalp team and the broader scalping community on the use of indicators in scalping. For the reasons mentioned above, the CScalp terminal did not include any indicators except trading volume. However, the above does not mean that the indicators should be forever abandoned. They contain many unique mathematical views of the market. Understanding how indicators work broadens one's horizons and professionalism – after all, they are all built on formulas that are complex, interesting, and quite useful in their own right. The fact of the matter is that some traders simply have better priorities to spend their time on, and in the case of scalpers, studying indicators is not it. Most people settle for superficial information, and while one can get lucky for a while, a superficial scalper’s luck usually runs out before much gains are made. Why spend time on indicators when you can gain a lot of market insights through other ways? Leave it to analysts and market theorists. For a scalper, time spent analyzing indicators is time not spent practicing the craft. Make of that what you will, but sooner or later, any practicing scalper learns this lesson: indicators are by and large inefficient, and scalping is better done without them.

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