If you are here, then we can assume that you are using indicators. If not, at least you are aware of them or interested in learning about them, right? Some of the popular ones include the Bollinger bands, MACD lines, parabolic SAR, stochastic oscillator, relative strength index, average directional index, Ichimoku Kinko Hyu, and many more. Indicators may fall under one of the two types: leading and lagging. We will get to know more about what this means as we go on.
Team leading indicators or team lagging indicators?
Leading indicators give out signals right even before a new trend or reversal happens. If you know how the price will behave next, then you might get a better profit. Usually, these indicators tell us how overbought or oversold something is. Assuming that a currency pair is oversold, then it tends to bounce back.
On the other hand, lagging indicators give out a signal when the trend already started. It makes you aware that the trend already started, and you might be missing out. We can say that these indicators are effective when the price moves in long trends. Unlike leading indicators, they do not give information about price changes that are about to happen. However, they can tell you if the price is either falling or rising, which can help you make better trading decisions.
Are these important to know?
If you use leading indicators because you think that they will give you a better profit, you might be right since you can take better profits from new trends in the beginning. However, you might not always be right all the time since it is impossible to catch the whole movement all the time since the leading indicators are not always correct, are they?
Leading indicators can also give you fake-outs when you use them. After all, they only indicators, and they do not guarantee anything. If anything, they are there to guide you and help you develop trading ideas. Sometimes, they can also give bogus signals that might leave you with misleading information.
If you want to avoid these fake-outs, then you have another option. You can always choose lagging indicators that only give out signals after the price change already have a clear and formed trend. There may be times that your position entry is late. If you should know, you can attain the trend’s most significant gains in its first few bars. If you use a lagging indicator, you might miss that much profit. Buying or selling late may indeed leave you missing out on early opportunities, but it will not leave you in danger of risks and fake-outs.
Weigh all the consequences that genuinely matter to you, whether your basis your knowledge or experiences.
To cap it off
It might be safe to say the leading indicators are mostly oscillators, while lagging indicators are the ones that follow trends. For better trading results, it might be wise to use leading indicators when the market is ranging, and lagging indicators work best when the market is trending. Happy trading!
