How To Use Leading And Lagging Indicators In Currency 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.
What are leading indicators? As the name suggests, a leading indicator leads the price action in the market and gives buy or sell signals ahead of the reversal in the trend or ahead of the start of a new trend in the market. Leading indicators are considered to be very important as they give you the trading signal ahead of time. One of the most popular leading indicator is the pivot points. There is a whole method of trading called pivot point trading that has been developed over time. Pivot points combined with fibonacci retracement can be highly effective. Pivot points can be calculated for any market. The other popular leading indicators are the oscillators like the Relative Strength Index (RSI) and the Stochastics. However, the problem with most of these leading indicators is that they often give false buy or sell signals. They need confirmation from other indicators.
On the other hand, as the name suggests lagging indicators are lagging behind the price action. Lagging indicators are often later. Sometime too late in giving the buy or sell signals. Since these indicators are lagging, they tell you about the reversal in the trend or the start of a new trend afterwards that might be late for you. Most popular lagging indicators are the Moving Averages. Moving averages are of three types; 1) Simple, 2) Exponential and 3)Weighted. Another very important lagging indicator is the MACD ( Moving Average Convergence Divergence). Moving averages and MACD are widley used by stock traders, forex traders, futures traders and options traders!
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.
Now, professional traders combine the stochastics with the MACD on 1 Hourly charts to identify the trend for the day. What you need to do is master the use of these leading and lagging indicator combination!
by: Ahmad Hassam
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