Technical analysts use 3 types of indicators to take decisions while they trade. These indicators are categorized based on the information they are conveying about the trades on the time-scale. These indicators are called Leading indicators, lagging indicators, and coincident indicators. These indicators tell about the future, past, and the present of the trades respectively. In this article, we will define these indicators and categorize the indicators which fall into these categories.
Leading indicators, as the name suggests, help you anticipate the price movements of assets, stocks, or cryptocurrencies and predict the future direction of the markets. Sounds magical but the leading indicators rely upon the most common variable – price.
Common leading indicators include:
- Moving Average Convergence Divergence (MACD)
- Simple Moving Averages (SMA)
- Stochastic Oscillator
- Relative Strength Index (RSI)
Some additional leading technical indicators include the relative strength index (RSI) or volume, which is more easily recognizable. Volume tends to show changes even before price as it truly represents the ever-changing buying and selling pressures in the market.
Lagging indicators help traders learn by giving them feedback about the price movements of assets, stocks, or cryptos. Generally, lagging indicators are tools used by traders to analyze the market using an average of previous price action data. Even with the delayed feedback, traders prefer to use lagging technical indicators as it helps them to trade with more confidence by validating their trade decisions since the decisions are not based on anticipation but analysis.
Common lagging indicators include:
|LEADING INDICATORS||LAGGING INDICATORS|
|Advantages||Provide favorable entry points for a possible move.||Provides more confidence to enter trades – confirms the recent price action|
|Assist traders in entering higher probability trades by identifying key levels||Reduces the risk of failed moves or false breakouts|
|Limitations||Anticipated price action is not guaranteed. Traders need to apply their own knowledge of these indicators in each situation||Traders sacrifice potential opportunities while waiting for confirmation from the lagging indicators|
|Leading indicators are often more insightful in advanced technical analysis techniques, such as Elliott Wave Theory, which may be daunting for new traders||Lagging indicators have no concept of key levels, therefore, traders need to be aware of this|
None of them are perfect indicators. Technical analysis is never considered a holy grail. Especially in the crypto markets, the movements have peaked at the ranges of unpredictability. Traders looking for fast signals will tend to favor leading indicators but can also reduce the time period setting on lagging indicators to make them more responsive. The trader has to conduct a thorough analysis, with the aim of stacking the odds in their favor. Further analysis of trend, sentiment, and momentum will help to confirm or invalidate the trade.