Predicting Early Market Movement – Leading vs. Lagging Indicators

In financial trading almost every trader uses some kind of technical indicator for market prediction or to validate his/her trade decisions. There are hundreds of indicators for predicting early market movement available in different platforms and over the internet based on different strategies and mathematical calculations.

Now the problem is most of them are lagging indicators, meaning they generate a Buy or Sell signal when the market is already moving in the respective directions. On the other side there are some leading indicators which lead the price and generate signals in advance for market reversal or the start of a new trend.

Leading Indicators:

Indicators which potentially predict the market movement in advance are known as leading Indicators. Leading indicators offer better signals and more profitable trades than lagging indicators. But there is one drawback to using them that traders must consider; these indicators are less reliable and sometimes give false signals. In Order to avoid this it is recommended that leading indicators must be used in conjunction with other methods/indicators.

Some of the leading technical indicators are RSI or Stochist and you can learn how to use these in our indicators guide.

Lagging Indicators:

Lagging indicators are less profitable than leading indicators and most of the time generate signals when the market movement has already happened. Many traders who use such indicators lose a good portion of the trend. Such indicators negatively affect the money and risk management of the trades and risk reward ratio.

Now the good thing with these lagging indicators is that as they generate signals when the trend/reversal is already in action, they give less false signals. Again, traders can make good use of lagging indicators if they use them in conjunction with other useful indicators. Some of the lagging indicators are MACD, Bollinger Bands, and Moving Averages.

Take a look at our Forex Education section to find more trading related articles.

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