Leading vs. Lagging Indicators


o you remember when you were a little kid and asked your dad why he had so many different tools in his garage?

What did he reply? We could guess that he explained that every tool has a different purpose and it is very important to know which tool you need to use to fix a particular component of your car. 

Forex works the same way as your dad’s car. In order to have a strong trading strategy(or working engine), you need to know the strengths and weaknesses of each tool. 

There are two types of indicators: leading and lagging.

A leading indicator will give you information before the new trend or reversal occurs, so you can make money by predicting where prices will go next.

Usually these indicators determine how “overbought” or “oversold” the market is.

It means that  if a currency pair is “oversold” or “overbought”, it will probably bounce back.

A lagging indicator usually confirms the trend. They send confirmation signals after the actual occurrence of the event. 

These trading indicators give us a signal to confirm that the trend in the chart is in full swing. Saying ‘Get a move ON now!’. 

Lagging indicators are used usually when prices move in relatively long trends.

Keep in mind that they won’t indicate any upcoming changes, but they will tell you what is happening now in the market if you want to act on it. 

We can guess that you already have in mind that you will be using only the leading indicators, relying they will show you the trend in advance, so you can make some good money out of it.

“Who cares for those retards – the lagging indicators?”

If those were the words coming in your head, don’t start trading, please! 

You missed the first and foremost important rule – there is no tool, which can be accurate 100% of the time. 

Using leading indicators, there is a big chance to experience a lot of fakeouts.

On the other hand, lagging indicators have a stronger immune system against false signals.

But every advantage comes along with a disadvantage. It is true that you could be a little late in entering a position, if you use lagging indicators. 

Especially, when knowing that the big bucks comes in the first few bars after the trend occurs.

On the bright side, these retards could save you a lot of stress and money by reducing the risk and confirming the trend. 

Leading and lagging indicators can complement each other, but later you will see that they’re likely to get in a conflict with each other.

A lot of drama happens around those two when they don’t agree on the trend. 

For example, lagging indicators don’t work well in sideways markets, but leading indicators do perform efficiently in ranging markets!

Basically, the belief is that you should apply lagging indicators during trending markets and leading indicators during sideways markets.

Don’t take this as you should choose one and use it exclusively on the particular market, rather go in-depth research which one will work best for you when and why. 

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