What are the Best Technical Indicators for Algo Trading?
What are the Best Technical Indicators for Algo Trading?
In trading, performing the technical analysis is not only important but also becomes the prime tool to know the market conditions and identify the best trading opportunities. Technical indicators play a key role in technical analysis, whether it is done manually by human intelligence or through automated trading software like Algo. Without using the technical indicators analysis would be incomplete.
Though, there are unlimited technical indicators that you can use in technical analysis, but few of them are very popular and can give you better results. In manual trading, analysts choose the indicators as per their trading perspective and interpretational skills. In Algo Trading, the scenario could be different because of algorithms used to train the Algo software to use such tools as per the market conditions.
The technical indicators in Algo Trading play an important role in identifying the best trading opportunity after analyzing the various factors affecting the price movement. Algo use is for identifying the trend, measuring the volatility, checking the level of volume and measuring the momentum.
Moreover, in Algo, it helps to identify the support and resistance or overbought and oversold levels to predict the market movement or trend reversal. The main motive for using the technical indicators in Algo Trading is to generate the buy and sell signal with stop loss and target points as per the trading strategy. So, let’s discuss about best technical indicators for algorithm trading.
Moving averages are one of the most common and widely used technical indicators in Algo Trading. It helps to identify the trend of the market or underlying security. Moreover, it can also help to identify the support and resistance levels in the underlying security or market. There are two types of moving averages Simple Moving Averages (SMA) and Exponential Moving Averages (EMA) used in Algo Trading.
The SMA is calculated by taking the average price of various trading periods, while in EMA the higher weightage is given to the latest prices. When the price of the underlying security or market is trading above the moving average, then its uptrend, while price moving below the moving average is usually considered a downtrend. Algo trading is used in combination with other indicators.
This is another very useful and widely used technical indicator also implemented by the Algo trading software while analysing the market. It is a kind of momentum oscillator that helps to measure the speed and change in the market movement or in the price of the underlying security.
It oscillates between the ranges of 0 to 100 and is used to identify if the market is trading in the overbought and oversold zone. When RSI is moving below the 30, it is considered the market is trading in the oversold zone and when it is moving above the 70 levels, it is considered the market is trading in the overbought zone.
Though, in trading the crossover the RSI and moving average can be used for trend reversal. In Algo Trading RSI is used to automate the trading signal when the market is trading in the overbought or oversold zone with the entry and exit points. In AlgoTest or TradeRadar algo trading software, can be also used for trend reversal and taking the right action as per the RSI indications.
This is another useful technical indicator also used by Algo in identifying the correlation or comparison between the two moving averages. There are three lines, MACD line, signal line, and histogram and when the MACD line crosses the signal line it gives the indication of trend and momentum.
In Algo Trading, it is used to identify bullish and bearish trends in the market or in the underlying security while indicating the potential trading opportunities with buy or sell signals. However it can be mainly used to point out the momentum shift with an indication of trend direction.
This is another useful oscillator that helps to identify the overbought and oversold zone as per the movement or you can say the volatility in the market. There are three bands, the middle one and two outer bands representing the volatility in the market or price of the underlying security. These bands contract and expand as per the level of volatility in the market giving the trade signals accordingly.
When the price touches the upper band, it gives the signal the market is trading in the overbought zone, while hitting the lower band indicates the market is moving in the oversold zone. Here Algo Trading system automated such indicators to get the indication of buy or sell signal as per the position of bands. However, these bands can be also used to identify the volatility and potential price breakouts in the market.
Just like RSI, it is also a momentum oscillator that oscillates between 0 and 100 that compares the closing price of the security’ to its price range over a specific period. When it moves at the level of 20, it indicates the price is trading in the oversold zone, while reading higher than 80 means the market or underlying security is overbought demonstrating the efficiency of security.
In Algo trading the strategies can be activated to respond as per these indications with the entry and exit points automating the trading activities. In Algo trading, a stochastic oscillator plays a greater role in giving the overbought and oversold indication in combination with other indicators.
This technical indicator helps to measure the average range between the high and low prices for a specific period, usually 14-day periods. Traders use this indicator to get insight into the market volatility helping them to fix the stop loss and determine position sizes as per the market conditions.