🔍
How To Combine LEADING & LAGGING Indicators (Best Trading Indicators for Beginners) - YouTube
Channel: The Secret Mindset
[1]
Many traders and investors use indicators
to spot market patterns and trends and most
[7]
of these indicators fall into two types: leading
and lagging.
[11]
A leading indicator is a tool designed to
anticipate the future direction of a market,
[16]
in order to enable traders to predict market
movements ahead of time.
[20]
In theory, if a leading indicator gives the
correct signal, a trader can get in before
[26]
the market movement and ride the entire trend.
[29]
However, leading indicators are by no means
100% accurate, which is why they are often
[35]
combined with other forms of technical analysis.
[40]
A lagging indicator is a tool that provides
delayed feedback, which means it gives a signal
[46]
once the price movement has already passed
or is in progress.
[50]
These are used by traders to confirm the price
trend before they enter a trade.
[55]
These indicators are commonly used by trend
traders, they don’t show any upcoming price
[60]
moves but confirm that a trend is underway.
[64]
This tends to give traders more confidence
that they are correct in their assumptions,
[68]
rather than providing a specific trigger for
entering the market.
[72]
So, what’s the difference between Leading
and lagging technical indicators?
[78]
The most obvious difference is that leading
indicators predict market movements, while
[83]
lagging indicators confirm trends that are
already taking place.
[88]
Both leading and lagging indicators have their
own advantages and drawbacks, so it’s crucial
[93]
to analyze yourself with how each works and
decide which fits in with your strategy.
[99]
Leading indicators react to prices quickly,
which can be great for short-term traders,
[104]
but makes them prone to giving out false signals.
[107]
Conversely, lagging indicators are far slower
to react, which means that traders would have
[108]
more accuracy but could be late in entering
the market.
[109]
Leading indicators react to prices quickly,
which can be great for short-term traders,
[110]
but makes them prone to giving out false signals.
[111]
Conversely, lagging indicators are far slower
to react, which means that traders would have
[113]
more accuracy but could be late in entering
the market.
[119]
Lagging indicators are tools used by traders
to analyze the market using an average of
[124]
previous price action data.
[126]
As the name implies, these indicators lag
the market.
[130]
This means that traders can witness a move
before the indicator confirms it – meaning
[135]
that the trader could lose out the start of
the move.
[139]
Many consider this as a necessary cost in
order to confirm if the move gathers momentum.
[144]
Others view this as a lost opportunity as
traders are missing getting into a trade at
[150]
the very start of a move.
[152]
A lagging indicator often makes use of price
as an input variable and in most cases, requires
[159]
a longer look back period in order to ascertain
trends.
[163]
Even with the delayed feedback, many traders
prefer to use lagging technical indicators
[168]
as it helps them to trade with more confidence
by validating their trade decisions.
[174]
Usually traders make use of two or more lagging
indicators to confirm price trends before
[180]
entering the trade.
[181]
This can be viewed as a conservative way to
trade, but do not let this draw you into a
[186]
false sense of security that you can make
the best decisions and make money consistently.
[192]
Let’s look at a classic example of a lagging
indicator, namely the moving average.
[198]
In this set up we added a 50-period and a
200-period moving average, to trade the golden
[204]
and a death crosses, which are bullish and
bearish crossovers of the 50 and 200 SMA’s.
[211]
Generally, the asset is said to be bearish
when the 50 SMA crosses below the 200 SMA
[217]
and bullish when the 50 SMA crosses above
the 200 SMA.
[223]
In this chart notice that the signals generated
by the bullish and the bearish crossovers
[227]
of the 200 and 50 period moving averages occur
very late.
[231]
In the first signal for example, if you went
short after the bearish signal, it would have
[236]
been a losing trade.
[237]
This is because by the time price moved lower
and the moving average reacted to this, price
[243]
already fell significantly and started to
pull back higher.
[247]
I’ve also read a lot of false information
regarding RSI, Stochastic and other Momentum
[254]
oscillators, which were associated with the
leading indicators category.
[258]
No, they are not leading indicators.
[261]
Although those indicators will generate a
lot of good signals if traded correctly, they
[266]
will not lead the price.
[268]
Just because they tell you how overbought
or oversold a market is, this doesn’t mean
[273]
that they are leading the price.
[275]
Now, I’m not saying you shouldn’t use
lagging indicators, because they can help
[281]
you make informed decisions.
[283]
Just remember that lagging indicators can
only provide “today’s “value based on
[288]
the historical data.
[290]
Since these indicators lag the price of the
asset, a significant move in the market generally
[296]
occurs before the indicator can provide a
signal.
[299]
The truth is that almost every technical indicator
is a lagging indicator.
[303]
Moving averages, MACD, the RSI, Stochastics,
you name it, are lagging.
[310]
First there's a move in price, then sometime
later in the game, the indicator signals buy
[315]
or sell signal.
[317]
They lag behind market action.
[319]
They give signals after the fact.
[322]
It is really important for you to understand
how the lagging indicators work and how the
[327]
data is compiled before incorporating them
into trading strategies and risking capital
[332]
on those strategies.
[334]
Always remember that the price moves indicators
– not the other way around.
[339]
This is why they always look profitable when
you look at them at the left side of the chart
[344]
when the price action is already unfolded.
[348]
Leading indicators are different.
[350]
Leading indicators are indicators able to
precede the price movements of an asset due
[354]
to their predictive qualities.
[356]
While, lagging indicators follow price movements
and don’t have reliable predictive qualities,
[362]
leading indicators are able to anticipate
when major moves in the markets would occur.
[367]
A leading technical indicator is designed
to anticipate future price moves in order
[371]
to give an edge.
[373]
As magical as this sounds, a leading indicator
relies upon the most common variable – price.
[380]
A Leading indicator will allow you to anticipate
future price movements and therefore, you
[385]
will be able to enter trades potentially at
the start of the move.
[389]
The downside is that traders are anticipating
a move before it actually happens and the
[394]
market could move in the opposite direction.
[396]
As a result, it isn’t uncommon to witness
false breakouts, or, signs of a trend reversal
[402]
that just land up being minor retracements.
[407]
So which indicators or tools I consider to
be leading indicators.
[411]
Well, pivot points are leading indicators.
[415]
Pivot Points are levels that were used by
floor traders to determine directional movement
[420]
and potential support/resistance levels.
[423]
By analyzing today’s high, low, and close,
you are able to calculate the next day’s
[428]
pivot point, as well as potential support
and resistance levels.
[432]
Part of what makes the Pivots Points so reliable
is the fact that they are based purely on
[437]
price.
[438]
Plotting these levels allows you to know in
advance some key levels for the next day.
[443]
You know that if the price reaches this area,
for example, there will be a reaction: a rejection
[449]
or a breakout.
[451]
Fibonacci Retracements and extensions are
also leading tools.
[455]
This means that you can decide on the likely
direction ahead of it happening as compared
[460]
to a lagging indicator which only predicts
movements after it has already started to
[465]
occur.
[466]
As Fibonacci is a leading indicator you will
see the entry point and place an order in
[471]
advance of the market reaching your desired
level.
[476]
Other traders also consider volume as a leading
indicator, but only in conjunction with price.
[482]
Trend lines, support and resistance levels
can also be considered leading tools, because
[487]
you can plot them on your chart and find levels
where the price can react.
[492]
Leading indicators tell you ahead of time
where the market is likely to find support
[496]
or where the market is likely to find resistance.
[499]
Now, SHOULD YOU USE LEADING OR LAGGING INDICATORS?
[503]
For traders, it is often the dilemma of finding
a balance between them.
[508]
Rely only on leading indicators and chances
are you will see a lot of false signals.
[513]
Rely only on lagging indicators and you will
likely enter late and hold on your trades
[518]
too long and give back most of the profits.
[522]
Traders looking for fast signals will tend
to favor leading indicators.
[526]
Traders seeking a greater degree of confidence
will tend to favor lagging indicators.
[533]
The trick is to achieve the proper balance
by mixing leading and lagging indicators across
[537]
time frames.
[539]
If you can accomplish this objective, you
can come up with a trading approach which
[542]
is far superior to using either of the two
exclusively.
[546]
With these obvious drawbacks, it is best to
develop a trading strategy that combines both
[552]
leading and lagging indicators.
[555]
For example, you can use a lagging indicator,
like a 200 EMA and a leading one, the pivot
[562]
points.
[563]
First, determine the context for the trade
using the lagging indicators.
[567]
So if the price is below the 200 EMA, we have
a downtrend, and above 200 EMA, an uptrend.
[574]
Then establish the entry level using the leading
indicator, namely the pivot point.
[579]
You can buy a pullback for example, at the
central pivot point, when the market is above
[584]
200 EMA, in the direction of the trend.
[588]
You can continue to use the leading indicator
to find a stop placement point, meaning your
[592]
stop loss order.
[594]
In the case of this uptrend, this would be
below a substantial support level, maybe below
[599]
S1 level.
[601]
Or you can use a Fibonacci retracement and
an oscillator, like the Stochastic, again
[607]
a leading and a lagging tool, side by side.
[610]
You can enter after a Stochastic divergence,
or an oversold Stochastic, when the price
[615]
rejected an important FIB level.
[618]
Again, try find the proper balance by mixing
leading and lagging indicators, with the aim
[624]
of stacking the odds in your favor.
[627]
If you learned something new and found value,
leave us a like to show your support, subscribe
[631]
to our channel and click the bell icon to
stay in touch when we upload new videos.
[637]
Until next time.
Most Recent Videos:
You can go back to the homepage right here: Homepage