Every profession comes with unique tools that allow such individual to perform their job excellently. For instance, a tailor needs special tools such as a sewing machine, threads, scissor and other items to sew a cloth perfectly. When it comes to trading, traders also require tools to not only analyze but also trade the market. Trading has a lot of tools for anyone to use, such as news, chart patterns, candlesticks, and so on. However, one tool that resonates with most traders is indicators, especially leading and lagging indicators.
Indicators are essential tools for technical traders to help identify market trends and patterns. Besides this, they also help identify volatility, momentum, and other aspects of the market. While some traders rely on using a single indicator to determine when to buy or sell, others use it in conjunction with other tools such as chart patterns and price movement to analyze the market.
In this article, we will help you figure out everything about leading/lagging indicators. Traders use a combination of both indicators in their overall strategy. Trading with indicators can go a long way in increasing your accuracy when analyzing the market. You can take advantage of these indicators and improve your trading results every day. Finally, you will know the difference between leading and lagging indicators when trading. Let’s see if these one make our Best Metatrader Indicators page.
A leading indicator is a forex tool that helps traders to anticipate the future movement of a market and make a prediction of the market ahead of time. Traders get into the market before the market makes any movement as long as such an indicator gives you the accurate signal.
Nevertheless, it doesn’t mean that they are 100% accurate because they give signals before the market price moves. Because of this, many traders use other forms of technical analysis to combine with leading indicators to get an accurate result.
There are various leading indicators you can use when trading. However, we will briefly look at the important ones that can generate better signals when trade. The four most popular leading indicators include Williams %R, relative strength index (RSI), On-balance volume (OBV), and the stochastic oscillator.
The Williams %R indicator works similarly as the stochastic oscillator indicator; however, the only difference is that the Williams %R works on a negative scale. The Williams %R ranges are from zero to -100 while it uses -20 and -80 as areas of overbought and oversold respectively.
If you want a highly responsive indicator, then this indicator will suit that purpose. Interestingly, it moves to lows or highs even when the actual market price doesn’t move towards that direction. Notwithstanding, a lot of traders prefer to use -10 and -90 and a more reliable area to enter a trade since these signals can be less reliable at times.
Relative Strength Index
For momentum traders, the relative strength index indicator helps to identify when the market is either overbought or oversold. There is an assumption that whenever the RSI generates a signal, there is every tendency that the market will reverse. With this, traders can enter or exit a particular position.
The indicator uses a scale that ranges from zero to 100. Whenever price crosses the 70 mark, the market is considered to be in a state of overbought. In order words, the bulls are exhausted; they lack the muscles to push the market upper. Alternatively, when the indicator falls below the 30 level, then it is an oversold condition. In this case, sellers have lost steam to push the market downward.
A lagging indicator provides delayed information regarding price movement over some time. In other words, it generates signals after the price has passed or is in progress in a particular direction. It’s like a race with three runners on the track; assuming the first runner is ahead of the other two, the second that follows the first runner becomes the lagging indicator. Hope that makes sense to you.
Traders use lagging indicators to confirm the trend of a market before entering a trade. Similar to the leading indicators, we also have different popular lagging indicators that traders can take advantage when trading. However, trend traders commonly use these indicators they don’t display future price movement. Instead, they act like confirmation indicators the market trend is underway. With this, traders can be confident to enter or exit a particular trade.
Finally, if you want to filter the noise in a short-term market while confirming a long-term trend, lagging indicators are the essential go-to tools to use. The popular lagging indicators among traders are the moving averages, Bollinger Bands, and MACD.
One important tool almost every trader use when trading is the moving average. They are grouped as lagging indicators because they are based on historical data. Traders use two moving averages with different period.
You can calculate moving averages on any timeframe depending on your goal as a trader. Using the moving averages, you must understand that it also generates false signals. The longer the timeframe, the longer the indicator lags.
The Bollinger band is another lagging indicator that uses a 20-day simple moving average (SMA) with an upper and lower band. The bands represent two standard deviations from the moving average, which helps traders to use it as a measure of volatility.
Whenever the level of volatility decreases, the band contracts. When the volatility increases, it widens. For traders, when the price reaches the outer bands, it acts as a trigger point for the market to rebound towards the 20 SMA.
The difference between Leading and Lagging Indicators
It is obvious for you to recognize the distinctive features of the leading and lagging indicators. Leading indicators predict future price or market movement of an asset, whereas lagging indicators confirm the direction of a particular market or trend.
Although they are different, they do have certain advantages and drawbacks that make traders choose one over the other. It is, therefore, important to discover what these are and implement them in your strategy.
For instance, leading indicators react faster to price and are suitable for short-term traders. Despite this, they are prone to generating false signals. On the other hand, lagging indicators are slow to react to the movement of price but provide more accuracy when generating signals.
Closing Remarks On leading and lagging indicators
Leading and lagging indicators help traders to analyze the market, find the best entry, and exit points. With these tools, it is easy for you to take advantage of the market trend. However, these tools are not 100% accurate and subject to generating false signals.
Nevertheless, we have important tools here on this link, which you can use to implement with these indicators to generate the best signals possible in the market.