The stochastics indicator is similar to the relative strength indicator in that it measures the momentum of the market and can warn as to when a market is perceived to be overbought or oversold.  Any reading above 80 is considered overbought and below 20 is considered oversold.

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Swing traders use the stochatic indicator to buy when the indicator is showing that the market is oversold and sell when the indicator is showing that the market is overbought.  This follows the idea that price moves in waves, and a trader should wait for a pullback (entering overbought/oversold) before entering a trade.

In addition to warning of possible overbought and oversold areas, the stochastics indicator can be used to monitor the momentum of a market.  If price continues to climb higher, but the stochastic indicator fails to make higher highs, it may be a warning that the market is running out of momentum and is preparing to undergo a pullback or retracement.

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The screenshot above shows price climbing higher making new highs.  However, the stochastics indicator is making lower highs.  This is a clear sign that the market may be running out of momentum and preparing to pullback or retrace.

Stochastics, like any indicator, is not perfect.  One should never enter a trade blindly using the stochastic indicator.  Instead, any signals given by the stochastic should be confirmed with either price action or support and resistance levels.

Relative Strength Index, or RSI, is a favourite amongst many bank traders.  It is a momentum indicator that helps identify the trend and potential overbought and oversold areas in the market.  The indicator’s scale ranges from 0 to 100.  Usually, readings below 30 indicate oversold and readings above 70 indicate overbought.

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When the indicator is showing the market as overbought or oversold, a top or bottom may be forming.  It is during these times that traders typically look to enter trades, close any open trades or tighten their stop losses.

The middle 50 line of the RSI is also used to identify a potential trend.

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During times of an uptrend, it is preferred that the indicator should be above the middle 50 line.  For downtrends, it is ideal that the indicator be below the 50 line.

Much like the stochastics indicator, RSI is also a momentum indicator and may warn of potential turning points in the market when momentum begins to drop.

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In the above example, price is in a clear down trend making lower lows.  However, RSI is making higher lows and shows a clear divergence with price.  This is a common sign of a loss of momentum in the market and may warn of a potential turning point before the market pulls back.

RSI, like any indicator is not perfect.  One should never enter a trade blindly using RSI.  Instead, any signals given by RSI should be confirmed with either price action or support and resistance levels.

Simple moving averages are perhaps one of the oldest and most widely used swing trading indicators.  Many traders use simple moving averages for trend identification.  The most common for swing trading are the 150 and 200 simple moving average on the daily chart to identify the long term trend.  There are other kinds of moving averages, such as EMA, but they are rarely used by banks and large players.

Moving averages are typically used for two purposes:

• Trend identification.
• Support & Resistance areas.

The 150 and 200 day simple moving average are typically used to identify the major trend.  When price is above the 150/200SMA, the trend is up.  When price is below, the trend is down.

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It may be hard to believe, but that is how many professional traders identify the major trend in many markets.  When price is above the simple moving average, they are looking only to buy or go long.  When price is below, they are only ever looking to sell or go short.

In addition to trend identification, simple moving averages are used by many traders as possible areas of support and resistance.  Swing traders use price bouncing off of the moving averages as part of their entry criteria.

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The above chart shows price clearly bouncing off of the 150 SMA and continuing on with the trend.  Similar entry conditions would be used when the market was in a down trend and traders were looking to sell or go short.

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The above image shows how the 150 SMA can be used to show potential areas that may offer resistance.  Price rallied up to the 150 SMA, found resistance (confirmed with a Japanese candlestick formation) , and then continued on down with the trend.

Of all the moving averages, professional traders favour the simple moving average over them all.  Keep it simple.  Use the 150 day SMA or 200 day SMA on your charts primarily to identify the major trend.