Leading and Lagging Indicators. What You Need to Know.
Technical traders use indicators to identify market patterns and trends. Most of these indicators fall into two categories: leading and lagging. Discover some popular leading and lagging indicators and how to use them.
What is a leading technical indicator?
A leading indicator is a tool designed to anticipate the future direction of a market, in order to enable traders to predict market movements ahead of time. See Leading Indicators
In theory, if a leading indicator gives the correct signal, a trader can get in before the market movement and ride the entire trend. However, leading indicators are by no means 100% accurate, which is why they are often combined with other forms of technical analysis.
What is a lagging technical indicator?
A lagging indicator is a tool that provides delayed feedback, which means it gives a signal once the price movement has already passed or is in progress. These are used by traders to confirm the price trend before they enter a trade. See Lagging Indicators
These indicators are commonly used by trend traders – they don’t show any upcoming price moves but confirm that a trend is underway. This tends to give traders more confidence that they are correct in their assumptions, rather than providing a specific trigger for entering the market.
Leading vs lagging technical indicators: what’s the difference?
The most obvious difference is that leading indicators predict market movements, while lagging indicators confirm trends that are already taking place. Both leading and lagging indicators have their own advantages and drawbacks, so it’s crucial to familiarise yourself with how each works and decide which fits in with your strategy.
Leading indicators react to prices quickly, which can be great for short-term traders, but makes them prone to giving out false signals – these happen when a signal indicates it’s time to enter the market, but the trend promptly reverses. Conversely, lagging indicators are far slower to react, which means that traders would have more accuracy but could be late in entering the market.
Relying solely on either could have negative effects on a strategy, which is why many traders will aim to find a balance of the two.