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How Institutional Traders Combine Leading & Lagging Indicators to Find High Probability Trades - YouTube
Channel: Financial Market Wizards
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many traders make use of indicators to help聽
them identify market patterns and trends聽聽
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most of these indicators can be聽
categorized as leading and lagging聽聽
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in today's forex trading video i want to show聽
you how to combine leading and lagging indicators聽聽
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but before i do that let me first briefly聽
explain what leading and lagging indicators are聽聽
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a leading indicator is one that is used聽
to anticipate the future direction of a聽聽
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market and thus allows traders to predict the聽
market direction ahead of time theoretically a聽聽
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leading indicator helps a trader get into a market聽
before the price moves however in reality leading聽聽
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indicators are not accurate 100 of the time this聽
is why traders often combine them with other forms聽聽
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of technical analysis to filter out the highest聽
probability trade setups a lagging indicator on聽聽
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the other hand is one that provides information聽
about the past movement it gives a signal once the聽聽
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price has already moved and while you may think聽
it's useless to know what is happening after the聽聽
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fact these indicators can still be useful it聽
is commonly used by trend traders and while聽聽
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they don't predict any upcoming price movements聽
they do help confirm that a trend is underway聽聽
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it gives traders more confidence in their analysis聽
rather than a specific trigger to enter the market聽聽
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now before i move on to the difference between聽
leading and lagging indicators and show you how聽聽
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to combine then i would appreciate it if you could聽
take three seconds to like this video and hit the聽聽
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subscribe button do turn on the notification bell聽
so you will not miss any future videos i release聽聽
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i also have a free day trading guide which you聽
can download via the link in the description below聽聽
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the most obvious difference between the two聽
is that leading indicators predict market聽聽
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movements while lagging indicators are used to聽
confirm trends that have already taken place聽聽
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both leading and lagging indicators have聽
their pros and cons and therefore you should聽聽
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combine both this way the disadvantages of聽
a leading indicator can be compensated by聽聽
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the advantages of a lagging indicator and vice聽
versa leading indicators tend to react to price聽聽
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quickly and are thus ideal for short-term聽
traders but because they are short-term in聽聽
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nature they are very prone to giving out聽
many false signals that result in losses聽聽
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lagging indicators on the other hand tend to react聽
slower and thus traders can expect it to be more聽聽
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reliable and accurate however the downside is聽
that by the time the signal is being generated聽聽
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it could already be too late to enter this聽
means that traders will witness a move before聽聽
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the indicator confirms it and the trader will not聽
get the best prices when using lagging indicators
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a lagging indicator makes use of historical data聽
as input and thus requires a longer look-back聽聽
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period to determine trends trend traders who use聽
these indicators often see this as a necessary聽聽
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confirmation that the price has gathered enough聽
momentum other traders who want to catch the best聽聽
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prices may view this as a lost opportunity聽
and thus opt not to use a lagging indicator聽聽
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even with the late signals many traders still聽
prefer to use the lagging indicators as it helps聽聽
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them further validate their trading decisions聽
it is rather common to see traders use two or聽聽
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more lagging indicators to confirm the price聽
trend before taking a trade while this may聽聽
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seem like a safe and accurate way to trade do聽
not let this create a false sense of certainty聽聽
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that you know for sure that the market is going聽
to do let's have a look at a moving average one聽聽
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of the most common lagging indicator for this聽
example i use a 50 period and 200 period moving聽聽
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average and trade whenever there is a crossover聽
between the moving averages this is sometimes聽聽
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known as the golden cross or the death cross when聽
using such an indicator the currency is said to聽聽
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be bearish when the 50-period moving average聽
crosses below the 200-period moving average聽聽
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and bullish when the 50-period moving average聽
crosses above the 200-period moving average聽聽
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in this chart example note that the signals聽
generated by the moving average occur rather late聽聽
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if you took the first signal and went long after聽
the bullish signal it would have been too late聽聽
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and you would have lost money this is because聽
by the time the moving average gave the signal聽聽
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price has already risen significantly now since聽
we are on the topic of lagging indicators i聽聽
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wanted to point out that there are tons of false聽
information about the relative strength index聽聽
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stochastic macd or other momentum oscillators聽
these are not leading indicators although these聽聽
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indicators are powerful and do generate a lot聽
of good signals when applied correctly they are聽聽
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merely a reflection of what price has already聽
done they do not lead prices don't get me wrong聽聽
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i am not saying to avoid using lagging indicators聽
since they can help you make better decisions聽聽
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i am saying that you have to understand how聽
they work and if you're confused just remember聽聽
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that lagging indicators can only provide signals聽
based on historical data since these indicators聽聽
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lag price you will observe a significant move in聽
the currency before the indicator shows a signal聽聽
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the truth is that almost every technical indicator聽
is a lagging indicator since it is derived from聽聽
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price moving averages rsi and stochastics are聽
all lagging always remember that the price moves聽聽
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the indicator not the other way around this is聽
also why they look so good on hindsight when聽聽
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you examine them on the left side of a chart where聽
the price has already unfolded leading indicators聽聽
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on the other hand are different they can predict聽
the price movement of a currency pair due to their聽聽
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predictive qualities a leading technical indicator聽
is designed to anticipate future price moves to聽聽
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give the trader an edge in the market and while聽
this may sound like a crystal ball it still relies聽聽
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upon the same common variable price a leading聽
indicator will allow you to anticipate future聽聽
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price movements and therefore help you enter a聽
trade before the price starts moving but because聽聽
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you're anticipating a move before it happens聽
the market could move in the opposite direction聽聽
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as a result of this it is common to witness聽
false signals that end up results in losses聽聽
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let's take a look at some indicators or tools聽
that i consider to be leading indicators pivot聽聽
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points are leading indicators they are levels聽
which are used by floor traders to determine聽聽
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the trend of the market and potential support and聽
resistance levels by noting the current days high聽聽
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low and close you will be able to calculate the聽
next day's pivot point as well as support and聽聽
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resistance level notice that i mentioned next day聽
and that's why pivot point is a leading indicator聽聽
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what makes pivot points so reliable is that聽
they are based purely on price plotting these聽聽
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levels on your charts allow you to know in advance聽
what are the key levels for the next trading day聽聽
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you can use these levels to determine if you聽
wish to trade the rejection or the breakout
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another tool that is a leading indicator聽
is the fibonacci retracement and extension聽聽
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it helps you predict the possible turning聽
points in the market before it happens聽聽
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contrast this to a lagging indicator which聽
only generates a signal after the price has聽聽
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already started to move fibonacci聽
allows you to act before the fact
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now some traders also consider volume as a leading聽
indicator but that's only when used in conjunction聽聽
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with price other tools that you could use as聽
leading indicators are trend lines and support聽聽
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and resistance levels these are tools that you can聽
plot on your chart and wait for price to react to聽聽
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they will tell you ahead of time or the聽
market is likely to be support or resisted聽聽
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now tacking the important question about whether聽
you should be using leading or lagging indicators聽聽
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this is often a dilemma among traders as they聽
struggle to find a balance between both of them聽聽
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if you rely solely on leading indicators chances聽
are you will see a lot of false signals which will聽聽
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hurt your trading account rely only on lagging聽
indicators and you will likely enter late and聽聽
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have a poor risk to reward ratio traders who are聽
looking to scalp the market will tend to favor聽聽
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leading indicators while traders who want more聽
confirmation will tend to favor lagging indicators聽聽
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the trick is to achieve the balances by mixing聽
leading and lagging indicators across multiple聽聽
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time frames if you can successfully do this聽
you will be able to have a trading strategy聽聽
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that is far superior to using either of聽
the two types of indicators in isolation聽聽
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here's an example of how you can combine both聽
lagging and a leading indicator you can use a聽聽
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lagging indicator like the 200 moving average聽
and a leading indicator like the pivot point聽聽
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first you want to use the lagging indicator to聽
determine the context of the text so if price聽聽
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is current trading below the 200 moving average聽
then it is a downtrend and you want to be selling聽聽
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if price is trading above the 200 moving average聽
then it is an uptrend and you want to be buying聽聽
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the next thing you want to do is to look for聽
an entry point using the leading indicator聽聽
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in this case i use the pivot point to illustrate聽
this you can sell a pullback at the pivot point s2聽聽
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when price is trading below the 200 moving average聽
in the direction of the trend you can also use the聽聽
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pivot point to set your stop loss order in this聽
case you might want to put your stop loss above聽聽
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s1 which is support that was previously broken聽
and now acts as resistance alternatively you聽聽
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can consider using a fibonacci retracement and聽
an oscillator like the msed again you can see聽聽
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that the pattern is the same you always pair聽
a leading in a lagging indicator side by side聽聽
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you can enter after the macd shows a crossover聽
when price rejects an important fibonacci level聽聽
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as mentioned you want to try to find the proper聽
balance between leading and lagging indicators聽聽
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to improve the odds of your trade if you learned聽
something valuable and useful from this video i聽聽
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would appreciate it if you could like this video聽
and subscribe to this channel do make sure to turn聽聽
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on the notification bell so you don't miss out聽
on any of our future videos i also have a free聽聽
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day trading guide which you can download via聽
the link in the description thanks for watching
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