Leading Indicators

Leading IndicatorsTechnical analysis offers a number of different ways to view and interpret the market. Depending on your trading style and the current market conditions you need to choose the right tools for the job. Learn about leading indicators here.

Indicators can help you understand what is going on in the market. Broadly speaking, we can divide indicators into two categories:

  1. Leading indicators
  2. Lagging indicators

The defining difference between these two groups is that leading indicators precede market movements, and lagging indicators, well, lag behind.

For practical uses, this means that lagging indicators work best when the market is moving in a trend, whereas leading indicators are preferable when the market is in a sideways movement.

The reason for this is that lagging indicators, such as Bollinger bands or the moving average, are especially adept at identifying and analyzing trends. They help you see beyond rapid price fluctuations, and instead focus on the broader movement – the trend.

Leading indicators like the stochastic oscillator or the relative strength index (RSI), on the other hand, focus on rapid price fluctuations. These fluctuations, or oscillations, can also be used to make money in binary trading.

This means that leading indicators are of less interest to trend following traders, but of crucial importance to traders who like to trade on swings. We can say, in general, that leading indicators are a much more important part of a swing trader’s toolkit than a trend follower.

 

How to make money on leading indicators

The first thing you ought to do in order to maximize the money making potential of trading with leading indicators, is to determine whether the market is in a trend or not. Ironically, this is something leading indicators won’t be able to help you with, so before you can use them you need the help of lagging indicators in order to identify any ongoing trends.

If you determine that price movements are random, i.e. not part of a trend, the oscillations you can pick up using leading indicators can help you predict market movements. If, on the other hand, the market is trending, then these oscillations will often not be suitable as signals. This is because they will often go in the opposite direction of the trend.

Here is a check list that you might find useful when using leading indicators:

  1. Keep in mind whether you are a swing trader or a trend follower. If you like to let trends lead your trading, then leading indicators might not be for you.
  2. Investigate the market conditions. Basically, is the market trending or not? If you see a lot of random price changes, and no trend in your chart, the market is moving sideways. This could mean that leading indicators could help you make good predictions.
  3. Use the right indicator. There are many leading indicators to choose from. Make sure you use one that is a good fit for the market conditions. Which indicator you use, will determine how you see the market.
  4. Be adaptable. The market is always moving, always changing and adapting. Therefore you need to be prepared for changing conditions. Depending on market conditions, you need to choose the right indicator. It might be wise to use more than one in order to get a complete picture. As conditions alter, you might want to ignore certain indicators, and rely more heavily on others.

There is one way to compensate for the shortcomings of leading indicators in a trending market as well. This method will enable you to generate signals also during trends.

What you do is use an oscillator, and a lagging indicator at the same time. When the lagging indicator shows that the market is in a bullish trend, ignore all bearish signals from the oscillator. When the lagging indicator shows that the market is bearish, ignore all bullish signals that the oscillator generates.

This way, you can trade on rapid price fluctuations that move in the direction of the trend.

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