By Jolon Warren
Swing traders could not ask for much more than an indicator that could offer the chance of knowing in advance when the market they were trading was at its breaking point. If you could know in advance when a market was ready to turn, this would greatly increase your chances as a trader of entering into a profitable trade. 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.
While many indicators are lagging, momentum indicators are leading. Put simply, they offer a glimpse at future price movement before it has occurred. 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, the indicators warn of this and alert traders that a possible retracement in future price movement may be about to happen. By plotting a currency pair's momentum, a trader can know in advance when markets may be preparing to pull back.
One such momentum indicator is called the RSI. 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. When a currency pair goes into overbought or oversold, there is a fairly good chance that it will retrace in order to adjust to the new price levels before it continues. By knowing in advance when this may happen, traders can close trades out early and lock in profits before they are wiped away and lost forever in the retracement.
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