Lesson #39 Comparison of Leading and Lagging Indicators

Many tools that can aid you to evaluate charts and recognize trends have already been discussed. If truth be told you might now have too many information to apply successfully.

Within this session we will strive for streamlining your use of these chart indicators. We would like you to completely be aware of the strengths and weaknesses of each tool. This way you will be capable of establishing which ones are effective for you and your trading plan and the ones that do not.

Difference of Leading and Lagging Indicators

Leading and lagging are two forms of indicators. But first, we should talk of a few concepts.

The buy signal prior to the new trend or occurrence of a reversal is a leading indicator.

A lagging indicator creates a signal as soon as the trend has started and essentially tells you that the trend has started so you need to take note or you shall miss the ride.

If you are thinking that you will get rich with leading indicators because you would be able to gain from a new trend right at the start. You are correct because you would “catch” the entire trend every single time that is if the leading indicator was right every single time. But it is not.

You may experience many fake-outs if you are using leading indicators. Leading indicators are notorious for providing fake signals which will “mislead” you. Do you follow those leading indicators which “mislead” you?

The use of lagging indicators, which are not as prone to fake signal is another option. Lagging indicators only show signals as soon as the price change is noticeably forming a trend. The disadvantage is that you would be a little behind schedule in entering a position. Frequently the biggest profits of a trend occur in the first few bars, therefore by using a lagging indicator you could probably miss out on much of the profit.

Identifying Oscillators and Trend Following Indicators

In this session we will generally categorize all of our technical indicators into one of two categories:

1. Oscillators

2. Trend following or momentum indicators

Oscillators are leading indicators.

Momentum indicators are lagging indicators.

Although the two can be supportive of each other, they are more expected to be in conflict with each other. It is not conclusive to say that one or the other should be used entirely but you must recognize the probable downside of each.