Having an indicator that was able to warn or show when markets were nearing turning points would make swing trading much easier. Knowing when markets were about to rally or retrace would make it easy to pick the perfect entry points for your trades. Being able to do this is probably the dream of almost any trader, no matter the market he or she trades. However, there are a wide variety of indicators available today and for many traders it seems almost impossible to pick an indicator that is capable of pin pointing these turning points. Luckily, such indicators already exist and when used properly they offer to give you an enormous edge while trading. These indicators are known as momentum indicators. Learning how to use these indicators correctly can drastically improve how well you trade.
The majority of indicators used by traders today are known as lagging indicators. They are lagging because they plot information only after price has moved. All the information lagging indicators show is based on price data that has already come and gone. However, momentum indicators are leading and actually lead price. Basically, momentum indicators offer an insight into what price may do in the near future. Momentum indicators work on the basis of measuring a currency pair s level of momentum. As a currency pair begins to slow down and lose speed or momentum, momentum indicators help you to identify this loss of momentum and warn that there may be a rally or retracement in the near future. By plotting a currency pair s momentum, a trader can know in advance when markets may be preparing to pull back.
RSI is one of the most popular and widely used momentum indicators. This indicator is a favourite of many bank and other professional traders. The RSI (relative strength indicator) shows levels of a currency pair that are considered overbought or oversold. When the indicator is in these areas, a trader should be on the lookout for potential price retracement. If a market moves into these overbought and oversold areas, more often than not price will experience some kind of adjustment in the near future. This clearly gives a trader an upper hand. Being able to know that price may make adjustments in the near future, traders can close trades out early and lock in profits before they are wiped away and lost forever in the retracement.
The best swing trading indicators are those that are leading and not lagging. Unfortunately, the majority of indicators available are in fact lagging. Many traders attempt to utilize these without a proper understanding of just what the indicator is displaying. You will never gain an insight into future price movements if your indicator is simply plotting past price data. If you want to know future price movement in advance, then take a look at momentum indicators, especially the RSI, today. Of all the momentum based indicators, RSI is the most widespread and widely used. You may find that the RSI is just the indicator you need to increase your trading edge.
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