What Is The Power Swing Indicator (PSI)?

The Power Swing Indicator, also known as PSI, is a technical analysis indicator traders use to identify potential market turning points and trading opportunities.

In this article, we’ll provide an in-depth look at how the Power Swing Indicator works and how traders can incorporate it into their analysis.

Defining the Power Swing Indicator

The Power Swing Indicator belongs to the family of momentum oscillators, which aim to measure the rate of change in an asset’s price movement over a set period. Specifically, PSI tracks the momentum swings of a price trend.

It is designed to identify extremes in buying and selling momentum. At its core, it measures the difference between two moving price change averages to quantify momentum swings.

The default settings for the PSI are:

• 13-period moving average of price change
• 39-period moving average of price change

As you’ll see in the following section, the interaction between these two moving averages is critical to generating trade signals with the Power Swing Indicator.

How is the Power Swing Indicator Calculated?

Here are the steps involved in calculating the Power Swing Indicator:

1. Calculate the rate of change (ROC) for each period:

ROC = (Current Price - Price n periods ago) / Price n periods ago

The standard ROC inputs are the current price and the price 13 periods ago.

1. Smooth the ROC using a 13-period exponential moving average. This gives you a faster-moving average line.
2. Smooth the ROC using a 39-period exponential moving average. This gives you the slower-moving average line.
3. Subtract the 39-period EMA from the 13-period EMA to create the PSI line.

PSI Line = 13-period EMA - 39-period EMA

That is how the Power Swing Indicator is measured. By tracking the interaction between two exponentially smoothed moving averages of ROC, PSI reveals momentum shifts in the price trend.

Traders will mostly focus on the shape of the PSI line and how it changes over time. The actual PSI values are not as important for generating trade signals.

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How to Interpret the Power Swing Indicator

When using the Power Swing Indicator, there are three main things to watch:

1. Crossovers between the two moving averages
2. Overbought/oversold levels
3. Divergences between price and PSI

Let’s look at each of these in more detail:

Crossovers

Crossovers occur when the faster 13-period EMA line crosses above or below, the slower 39-period EMA line.

• A bullish crossover happens when the 13 EMA crosses above the 39 EMA. This signals growing upside momentum.
• A bearish crossover occurs when the 13 EMA moves below the 39 EMA. This signals that the downside momentum is accelerating.

Traders often buy long on bullish crossovers and sell short on bearish ones.

Overbought/Oversold Levels

The PSI scale ranges from -100 to +100. Think of this like a momentum gauge:

• Readings near +100 indicate an overbought condition. A reversal or pullback is likely.
• Readings near -100 signal an oversold condition. A bounce back up is probable.

As such, traders may consider counter-trend trades when the PSI reaches overextended levels beyond +80 or -80.

Divergences

A divergence forms when the PSI line and the price trend move in opposite directions. This signals waning momentum, which can foreshadow a trend reversal.

• A bullish divergence forms when the price makes a lower low while PSI forms a higher low. This hints that buyers are stepping in.
• When the price increases, a bearish divergence develops, but PSI forms a lower high. This suggests that the uptrend is tiring.

Divergences don’t provide trade signals on their own. Look for confirmation from a moving average crossover or price chart pattern.

Mastering these three concepts will help you accurately interpret the signals produced by the Power Swing Indicator.

Optimizing PSI for Your Trading Style

The Power Swing Indicator is highly customizable beyond its default settings. Traders can fine-tune the PSI parameters to best fit their trading style, market, and time frame.

Here are some optimization tips:

• Adjust the periods for the faster and slower moving averages. For example, try a 20/50 PSI combo for somewhat smoother oscillation.
• Experiment with simple moving averages rather than exponential moving averages in the calculation. SMAs may shift momentum signals earlier.
• Use different price inputs besides close, such as open, high, or median price. This can generate earlier trade triggers.
• If trading broader swings, lengthen the lookback periods to deepen overbought/oversold levels or shorten them to be more sensitive.
• Play with different PSI threshold levels for identifying extremes. Widen or tighten the overbought/oversold bands as needed.
• To optimize the time compression, compare PSI results using daily, weekly, or intraday charts.

Keep a trading journal tracking your PSI adjustments and saving the best settings that suit your approach. The indicator is highly customizable to fit your market niche.

Give this article a read: Forex Trading Journal - Your Blueprint for Success

Why Using a Momentum Oscillator is Important

Momentum oscillators like the Power Swing Indicator play a role in analyzing markets because they provide insights into the driving forces behind price action.

Here’s why PSI and other momentum indicators are so valuable:

1. They reveal the rate of change in prices over time. Rapidly rising or falling momentum indicates the power behind a trend.
2. They identify extremes in momentum, hinting at cycle turning points ahead of price reversals.
3. They provide confirmation when price and momentum align in the same direction.
4. They warn of divergences when price and momentum disconnect, signalling impending trend changes.
5. They help determine entry and exit levels within trends as momentum ebbs and flows.

Quantifying the speed of price swings, momentum oscillators grant essential insights for timing trades and forecasting potential reversals.

Whether using PSI, RSI, or other options, incorporating a momentum tool in analysis is recommended.

You might also like to read: What Is a Trading Indicator and How it Helps You as a Trader

Summary

The Power Swing Indicator is a customizable momentum oscillator that can help traders identify turning points and market opportunities.

PSI signals a shift in buying and selling momentum by tracking the interaction between two moving averages of price rate-of-change.

Traders are encouraged to experiment with different parameter settings and apply PSI across various markets and time frames.

The key is consistently using the indicator, focusing on confirmations, and leveraging PSI as part of a broader trading plan.

With practice, the Power Swing Indicator can help pinpoint high-probability setups.

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“When considering “CFDs” for trading and price predictions, remember that trading CFDs involves a significant risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be considered investment advice.”