How To Use Leading And Lagging Indicators In Trading?
There are two types of indicators that are used by traders whether day trader or a swing trader: 1) Leading and 2) Lagging. Technical analysis without knowing and understanding these leading and lagging indicators is impossible. These leading and lagging indicators are the most important tools in the arsenal of any forex trader, stock trader or for that matter trader.
Now as the name implies, leading indicators are ahead of the market. They provide buy and sell signals prior to the new trend or a reversal in the trend occuring. Now, one of the most important leading indicator that your should be familiar with is the pivot points. Pivot points are used in stock, forex, futures or any other market. But when used alone these leading indicators can provide false signals. Other leading indicators are the oscillators like the RSI ( Relative Strength Index), stochastics and so on.
On the other hand, the lagging indicators as the name implies lags the market price action and provide information after a trend has started or a reversal in the existing trend has taken place. So, lagging indicators provide trading signals that are often late. Sometime too late for you to join the new trend because most of the profit is already lost. One of the most simple but highly popular lagging indicators that is widely used by traders in different markets is the Moving Average. Moving Averages can be simple or exponential. Other popular lagging indicator is the Moving Average Convergence Divergence (MACD).
Stochastics is one of the popular leading indicators that is used in different markets like stocks, forex, futures, commodities, options almost all the markets. Stochastics is based on a complex statistical formula that you need not go into. You just need to know this that it gives an overbought or oversold conditions in the market. It is scaled from 0 to 100. When it touches 80, the market is considered to be overbough and when it touches 20 level at the bottom, the market is thought to be oversold.
On the other had the MACD ( pronounced Mac Dee) is a lagging indicator that uses three exponential moving averages 12, 26 and 9. 12 represent the faster exponential moving average that uses the prices in the last 12 time periods. 26 represents the slower exponential moving average. 9 represent the difference between the two.
So what indicators to use? Professional traders combine the leading indicator with the lagging indicator to make the buy or sell decision. The best combination is combining Stochastics with MACD on 1 Hourly charts to identify the trend of the day. You must master these leading and lagging indicators if you want to make a successful trader.
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