Leading vs. Lagging Indicators

You are provided a lot of tools that can help you analyze potential trending and range bound trade opportunities. Still doing great so far? Awesome! Let’s move on.

We are going to streamline the use of these chart indicators in this lesson.

We desire you to make properly understood the strengths and weaknesses of each tool, so you can determine which ones work for you and which ones don’t.

Come to the some basic concepts first.

 There are two types of indicators:

1.      Leading indicator

2.      Lagging indicator

 Leading indicator

This indicator gives a signal prior to the new trend or reversal happen.

Lagging indicator

This indicator gives a signal after the trend has started and basically informs you “Hey buddy, pay attention, the trend has started and you’re missing the boat.”

You’re probably thinking, “Ooooh, I’m going to be a rich with leading indicators soon!” since you would be able to profit from a new trend right at the start.

 Yes, you’re right.

But, you need “catch” the entire trend every single time, IF the leading indicator was correct every single time. But it won’t be easy thing.

When you use leading indicators, you will experience a lot of fake outs. Leading indicators are notorious for giving bogus signals which may “mislead” you.

Get it?

Do you know how and which types of leading indicators can “mislead” you?

Haha. Man we’re so funny we even crack ourselves up.

The other option is to use lagging indicators, which might not be as prone to bogus signals.

 You can get signals only after the price change  in the lagging indicators. It is clearly forming a trend. The downside is that you’d be a little late in entering a position.

Often the biggest gains of a trend occur in the first few bars, so by using a lagging indicator you could potentially miss out on much of the profit. And that sucks.

It’s kinda like wearing bell-bottoms in the 1980s and thinking you’re so cool and hip with fashion….

Our aim of this lesson is to make things clarified enough to you. So, we have categorized all of our technical indicators into one of two major categories:

1. Leading indicators or oscillators
2. Lagging, trend-following, or momentum indicators

As the two can be supportive of each other, they’re more likely to conflict with each other. We’re not saying that one or the other should be used exclusively, but you must understand the potential pitfalls of each.