Leading And Lagging Indicators For Beginners
For those who trade using technical analysis, technical indicators are the core of their trading. Whether you day trade or swing trade, these indicators are extremely important. Technical analysis' principal purpose is to forecast future price movement. Understanding the art of trading patterns and indicators will help you in understanding them better. Technical indicators are separated into two types: leading and lagging indicators. In this post, we'll look at both types of indicators to see which one best suits your trading style. But before we begin, let’s talk about access to indicators. When you start trading, it is important to have one of the best trading accounts from the best share broker in terms of the number of indicators you can use. Zebull Smart Trader is a high-end online trading platform that gives you the widest range of leading as well as lagging indicators for you to choose from. With us, you can execute any complex strategy with any number of indicators. What is a Leading Technical Indicator, and how does it work? Leading indicators are used to anticipate future price changes and provide a trading advantage to the trader. Leading indicators provide an early signal of entry or exit and show price momentum over a period of time that is utilised to calculate the indicator. The following are some well-known leading indicators: Stochastic Oscillator RSI Volume William % R Volume profile Because volume gives us the buying and selling pressures in the market, it tends to indicate changes even before the price moves. For example, when a market top is formed, you can clearly see an exhaustion of buyers. If that is followed by an increasing number of sellers, then you can assume that the trend has reversed. What is a Lagging Technical Indicator, and how does it work? Lagging indicators are price reversal indicators that follow a trend and predict price reversals. These are especially useful if you follow a trend following strategy. They don't predict future price changes; instead, they just notify us whether prices are rising or falling so that we can invest accordingly. Despite the delayed feedback, many traders prefer lagging indicators since they let them trade with greater confidence by confirming their results. Before buying a stock, traders usually employ two or more lagging indicators to confirm price movements. Examples of lagging indicators: Moving Averages Moving averages convergence and divergence Let's look at an example: A 50 period 200 period moving average is a typical example of a lagging indicator setup. When the 50 MA crosses below the 200 SMA, a security is said to be bearish. When the 50 MA crosses above the 200 SMA, a security is considered to be bullish. If you consider the first signal from the moving average crossover and execute your trades, they might end up in a loss. The key reason for this is that by the time the price moves lower and the SMAs respond, the price would have already dropped significantly and reversed. Similarly, when we receive a bullish crossover indication, it is better to wait for a pullback before entering a trade. What is the difference between the two types of indicators? Signal Generation Leading indicators provide trading signals when a trend is about to begin, whilst lagging indicators track price movements. Time Periods to Avoid Leading indicators attempt to predict price using a shorter timeframe and, as a result, trail price fluctuations. Lagging Indicators provide signals after a trend or reversal has occurred. They can be used to determine the direction of the trend. Drawbacks of leading and lagging indicators Leading indicators are prone to false signals because they react quickly to price changes. Lagging indicators take a long time to react and might also send out false signals. Using Leading and Lagging Technical Indicators in Combination Traders can use a combination of a leading and lagging indicator to create a better trading system. For example, you can use RSI and Moving average crossover. In this strategy, you can wait for a buy/sell signal from RSI (a leading indicator) and wait for a confirmation from the moving average crossover to initiate a trade. Combining leading and lagging indicators can be a simple but powerful way to trade. Creating a trading strategy is an art. You need the best trading accounts from the best share broker to give you access to all types of leading and lagging indicators. This is exactly what we offer at Zebu. We have created a highly advanced online trading platform that helps you take the best possible trades with a host of indicators. To know more about Zebull Smart Trader, please get in touch with us now.