Leading and lagging technical Indicators

Forex traders are used to make a distintion between leading and lagging indicators. Leading indicators are those which anticipate further currency price movements. They provide a trader early signals of entry or exit from the market. They indicate price momentum over a number of periods used to calculate the indicator.

Some of the most famous leading indicators are: Commodity Channel Index (CCI); Stochastic Oscillator; Relative Strength Index; William % R; Volume.

Traders pay always a lot of attention to volume, as this parameter is able to anticipate currency price changes even before price as it is truly represent the buying and selling pressures in the market.

Lagging indicators, instead, are those which follow a currency trend instead of predicting price reversals. As they follow, and not anticipate, the market, they work well when prices move in long trends. They don’t signal upcoming changes in prices buy but simply tell whether prices are increasing or decreasing so that a trader can take his decisions accordingly. Even with the delayed feedback, many traders prefer to choose lagging indicators which help them to trade with more confidence by validating their results. Usually traders use two or more lagging indicators to confirm the price trends before entering the market. Moving Averages (MAs) and Moving Average Convergence and Divergence (MACD) are the most famous examples of lagging indicators.

A classic set up of lagging indicators is a 50-day 200-day moving average. A currency trend is said to be ‘bearish’ when the 50-day MA crosses below the 200-day SMA. Similarly, it is said to be ‘bullish’ when the 50-day MA crosses above the 200-day SMA.

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