There are in essence two types of indicators that help you make money on binary options: leading indicators and lagging indicators.
In this article you will learn all you need to know about lagging indicators. No trend following binary trader can earn a healthy profit without this knowledge.
Anyone with an interest in how you can make money by following trends and investing in binary options, are advised to read on.
Let’s start with the basics. An indicator is, in the context of binary options trading, a statistical tool that helps you figure out what the market is doing.
In a very basic sense we can divide such indicators into two groups:
What is the difference between the two? Let’s explain it this way:
Now, as you should know by now, binary trading is all about predicting future market movements. So, that means only leading indicators are of interest? Wrong.
The reason lagging indicators are of great use, is that they can help you recognize trends. And trends can be a great way to make money.
If you define yourself as a trend follower, finding trends is all you need to do in order to cash in. That makes lagging indicators fundamentally important.
So, how does a lagging indicator work? Let’s use one of the most popular and important lagging indicators – the moving average – as our example.
The moving average is a way of interpreting past market movements in a way that can help you make predictions about where the market is heading next. It is the fundamental tool when it comes to identifying trends.
When the moving average tells you that the market is in a trend, a trend following trader, can make predictions based on this knowledge. This can be a good way to make money on binary options.
So, a lagging indicator like the moving average shows you how the market has been moving. You choose your own timeframes, and so decide yourself how far back you wish to see the development.
By looking at the moving average you get a grip on the bigger picture, you filter out minor, constantly occurring oscillations, and see only the general movement of an asset’s price: the trend.
If you determine that the market is in a trend by use of lagging indicators, you can make money. If you have identified a bullish trend, you can cash in by investing in an up options. If you have found a bearish trend, you invest in a down option.
There is cause to be careful when using lagging indicators, however. There are two prime reasons for this.
The 1st of these points is very important to always keep in mind. Whereas lagging indicators like the moving trend can seem to tell a very clear picture, they do not offer a crystal ball vision of future events.
Even if you see a clear trend on your chart, what you are seeing is the past, and things can change quickly in the markets.
For this reason you ought to use other tools and methods to make sure the trend you are observing is dependable. For example momentum indicators can help you reveal whether an ongoing trend is going to continue in future also or not.
The second point is also crucial. Because when the market is not trending lagging indicators can cause confusion.
This is because random price movements up or down occur constantly when the market is not in an up or down trend. Over time these random movements will influence the moving average. You need to keep a keen eye on your chart not to be fooled into seeing a trend where there is none.
A way to help alleviate this problem is to filter the signals you generate with lagging indicators – for example by using the three moving average crossover technique. This will help eliminate false signals.