2 VERY IMPORTANT TECHNICAL ANALYSIS INDICATORS- LAGGING AND LEADING INDICATORS

LAGGING INDICATORS

Lagging indicators are indicators that are used to predict future price movement based on passed price activities. Lagging indicators are also called momentum indicators. One very important feature of lagging indicators is that it can be used to spot trends in the Forex market once the trends have been established but with one disadvantage. Lagging indicators only show how the market was not how it is presently, so there could be possible delay of entry. In simple terms lagging indicators follow the market, and only showing any data after the market moves.

TYPES OF LAGGING INDICATORS

       ·Simple Moving Average (SMA)

       ·Exponential Moving Average (EMA)

       ·Moving Average Convergence Divergence (MACD) 

There are other lagging or momentum indicators but for now I will discuss this.

Simple Moving Average (SMA)

Simple moving averages is basically used to forecast future currency prices, this is done by adding up the last “x” periods closing prices and than dividing the number by “x”. for example if I was plotting a 20 period simple moving averages on an  hour chart, I would add up the closing prices for the last 20 hours and divide that number by 20.

 Moving averages smooth out price action, if the moving average lines are very smooth it will be slower to react to price movement, whereas, if the moving average line is very ruff or choppy it will react to price movement quickly.

The simple moving average gives me an overall sentiment of the  market at a point in time and not the current price of the market.

Exponential Moving Average (EMA)

Exponential moving averages is an indicator that gets close to what the current price of the Forex market is and it shows what other traders are doing presently. Although, exponential moving average is a lagging indicator, it gives more current information than the simple moving average, which may be showing what traders did last week, last month or even last year, this data though important, may not be accurate compared, to what is happening in the market now, which is shown by the EMA.

`Moving Average Convergence Divergence (MACD)

This indicator is very interesting and I'm still studying it. The Moving Average Convergence Divergence (MACD)  is an indicator that identify moving averages that show a new trend, this trend could be a bearish or bullish trend.

The MACD indicator on a Forex chart usually shows 3 numbers. The first number is the number of periods that is used to calculate the faster moving average. The second number is the number of periods that is used in calculating the slower moving average. The third is the number of bars that is used to calculate the moving average of the DIFFERENCE between the faster and slower moving averages.

The lines of the MACD, that Is the two lines that are drawn are NOT moving averages of the price. They are the moving average of the DIFFERENCE between two moving averages.

The third line of the MACD is usually a histogram; this histogram plots the difference between the fast and slow moving averages. When the moving averages move separates the histograms expands, this is known as divergence. When moving averages moves towards each other, the histogram becomes small, this is known as convergence.  

LEADING INDICATORS

Leading indicators are indicators that are ahead of the market. Leading indicators are also called oscillators, this indicator main shows two data BUY or SELL; it indicates when the market is over bought or over sold. There are many leading indicators or oscillators but, I will only write on.

       ·Stochastic

<     ·Parabolic SAR
       ·Relative Strength Index

Stochastic: stochastic is a leading indicator that determine where a trend might end, stochastic also determines when the market is over bought or when it’s over sold, stochastic is scaled from 0 to 100, when the stochastic indicator lines are above 70 it means the market is over bought and when the stochastic lines is below 30 it means the market is over sold.

Parabolic SAR: This indicator is a very easy indicator to use; it appears as dots on the trading chart. When this dots are above the candle sticks it signals a possible Short or SELL signal, and when the dots are below the candles sticks it’s a possible long or BUY signal. This indicator works in a Stop and Reversal (SAR) pattern, and it works well in a trending market (up or down trend) it may not give accurate data if there is no trend or if the market is moving side ways.

Relative Strength Index (RSI): this indicator is very similar to stochastic, Relative Strength Index helps to show when the market is over bought or over sold. It could also be used to determine and confirm trend formations. This indicator is scaled 1 to 100, when trading if the RSI lines are above 50 it means there might be a possible up trend forming, and if the RSI lines are below 50 it means there might be a possible down trend forming.

More on lagging and leading indicators later. Thank you for reading article.