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Leading and Lagging Indicators, How to Use Oscillators and Momentum Indicators?

Leading and Lagging Indicators, How to Use Oscillators and Momentum Indicators?

We have already looked into a range of tool options that can potentially aid us in analyzing the various ranges of trades and trends. Now it’s time we aid you in gaining an in-depth understanding of each tool by analyzing their strength and weakness so as to assist in knowing what would work better for you and what won’t. So, let's begin with the two types of indicators: leading and lagging indicators.

  • A leading indicator is referred to as the tool that lends a signal before the occurrence of a new trend or in case of reversal of a trend.
  • On the other hand, a lagging indicator lends signal only after the trend has begun. In simpler words, it signals to you that the trend has already started and hence attention is required if you don’t wish to miss the boat. Lagging indicators aid in giving signals after the price change starts transforming into a trend. As the highest gains happen in the first few bars, by using a lagging indicator, one may end up missing on profits. So herein, let's categorize all of our technical indicators into two broad categories:
  • Leading indicators which are known as oscillators
  • Lagging also known as trend-following signals Even though both the indicators may seem supportive of each other, yet they are more likely to be conflicting. While we don’t say either of them must be exclusively used, however, it is necessary for one to understand their potential pitfalls.

How to Use Oscillators to Warn You of the End of a Trend

Leading and Lagging IndicatorsOscillators are the devices which move in ‘to-&-fro’ motion and here in terms of Forex trading, oscillators are the data which runs in a rhythmic momentum. These   oscillator signals towards the buy and sell happening or tend to occur in the coming future. Few examples of these oscillators are RSI (Relative Strength Index), Parabolic SAR and the stochastic indicator. Traders use these oscillators to forecast the slowing momentum when decidedly fewer traders are staying active at FX. Forex oscillators reflect the moments when the FX market reaches its very edge, either in selling direction or in buying one. They became instrumental when the market gets a high probability shape. The ongoing trend is weakening if there is a change in the momentum, the indicators are designed in a way that they reflect reversing trend.

Each of the oscillators has a different way of calculations, like stochastic works on high to low range of period. Talking about the RSI, it focuses on the variation of one ending point of trade to another. Parabolic indicator calculates as per its calculations, all these FX indicators aka oscillators tell about the changing pattern and reversing FX scenarios. Understand the fact that Forex is a market place which runs on high probabilities, nothing is factual and rigid here, and the same applies to the oscillators. Though, they forecast the real and most probable trading scenarios still there are chances that their predictions may fail. Hence it is suggested that when the chart is not meeting your criteria’s, then it's advised to not trade in that session.

Use Momentum Indicators to Confirm a Trend

Spotting a trend is one of the crucial parts to becoming a successful trader. MACD and moving averages are the indicators that you can use to identify trends and predict their future. Moving averages and MACD identify trends once they are established and lead to a delayed entry into the trend. The positive to this is that you can rarely be wrong in such a case and lose money, so that gives you a safer bet.

On USD/GBP’s chart for day to day prices, we put a 10-exponential moving average which is marked in blue and a 20 moving exponential average in red. The MACD is also plotted on the graph. Around mid-October, the pair showed a bullish crossover when the 10-exponential moving average took over the 20-exponential average. In case you had bet long on that trade, you could have made healthy profits since it was an indication of the beginning of an uptrend. Later, the MACD and the two moving averages gave two sell signals. If you had bet short then, you would have made good profits too because that led to a downward trend in the currency pair.

The above is an example of how you can bet and earn well using the two indicators. These provide good accuracy at the expense of getting on a trade before it begins. This means that if you follow the two indicators well, you will always have good profits. Thus, moment indicators are useful to predict a trend.

Conclusion: Leading and Lagging Indicators

We learned about lagging and leading indicators in the last lesson. In this lesson, let us take a quick recap of what we have studied. The indicators are classified in leading and lagging. A leading indicator gives a heads up before the new trend starts or a reversal in trend takes place, thus providing you with enough time to get on the trade. A lagging indicator is one that gives you a heads up about the trend once it has already started. Identifying the type of market is essential as that can help you segregate the indicators which are accurate and the others which can lead you down the wrong path. The question here is how to identify if you should use an oscillator or trend following indicator that that point or even both of them.

The answer to this is pretty straight forward. If you identify the type of market that you are dealing with, your work is done. The type of market gives you a heads-up which indicator you should use to make the best of the opportunities available and how to spot those opportunities. These heads up will help you understand the precise indicators and weed out the false ones. This is a skill that grows with time and experience so don’t expect to be great at it from the first day. As time passes, you will get a better hang of it and perseverance is the key to sustain in the market and make massive profits.

5 Comments

  1. sudeeptimalsena1 on August 11, 2019 at 1:11 PM

    nice

  2. sudeeptimalsena1 on August 11, 2019 at 1:14 PM

    nice.

  3. 11800090 on January 15, 2020 at 4:56 AM

    Nice

  4. Anil on July 28, 2020 at 11:28 AM

    Important information.

  5. Prajwalbajra1 on March 16, 2021 at 8:44 AM

    effectieinfo

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