Mainstream wise, TA indicators are grouped into Lagging Indicators and Leading Indicators.
Lagging Indicators
Trend indicators fall into this category as they assist us in identifying the underlying trend based on past movement. This would include indicators such as Moving Averages.
As per my previous post - One shoe size fits all, I had a section on Crossover with Moving Averages as examples - terms such as Golden Cross and Dead Cross should be a familiar term.
When a Golden Cross appears, it is normally after the change of trend has already occurred fo sometime, ie, not the first sign of trend change.
Same goes to a Dead Cross, the downtrend is already obvious from the price movement itself - hence why it is labelled as a lagging indicator.
So since it is lagging, why do we need these Lagging Indicators? Well, actually, we don't really "need" them. However, they assist in helping us to "visually see" the trend continuation. As for trend reversals, they are confirmations that trend reversals has already happened.
These Lagging Indicators can also be used as entry points for Fundamentalists whose Trading/Investing Plan mainly focuses on FA. A simple TA method to use for Fundamentalist is actually Moving Average Crossovers. A reliable indicator for safe entry when the holding period is for the longer term.
Leading Indicators
Leading indicators are those which are used to predict price movement - or potential trend reversals. Indicators such as the RSI would fall into this category.
As per my previous post - One shoe size fits all, I had many sections which demonstrates how it could be applied in practice.
So why is this considered Leading? Well, the idea is that these indicators are supposed to be used to predict the future price movement - as the key reversal point are being formed.
However do take note that, Leading Indicators are best used in a Trading Range rather than a Trending Market. Sometimes, an oscillator can remain overbought or oversold condition for some time, remember?
So anyway, there, a summary of leading and lagging indicators. A trading system, in my opinion, should have a mixture of these two elements as they do complement each other. One to identify early trend change, another to confirm and provide continuation signals.
4 comments:
Wow, Max... Nice article... but is it possible that indicators based on price averages be messed up when abnormal price movements exists such as sudden panic sale? or will it be even more useful in such instances?
The sudden movement will be picked up and be identified as trend reversal. However, prolonged scenario of panic sale will render the indicator useless.
E.g. RSI.
Rise previously as price trends up.
RSI at Overbought condition for sometime.
Panic sale then happens - RSI reverses to below 80, signalling bullish underlying condition no longer continues.
Signal trend reversal.
However, as sale continues, RSI plunged until below 20 and stay at that level. RSI is no longer useful.
OK.. second attempts to post. Yesterday failed. First to let you know I have read and read and read and yet I only see MA and RSI.. May I suggest, among the osccilators, which are consider lagging and which are the leading one. The KEY ..is to make full use of the leading indicators.. because we want to know before the actions take place :) How about another post on the outstandings indicators, other than RSI? .. an icing on the cake would be nice? My trademark is.. " I want more" .. hahahah... hungry for knowledge. Thank you very much.
There are many resources in the net which potentially could answer your question. Full listing of leading/lagging indicators are cumbersome and could not serve much purpose. Suffice to say, any indicator which has an overbought/oversold condition is considered to be leading.
Full use of leading indicators?
A system should be balanced to an extent, in my opinion, in order to see if the market condition is ranging or trending. Both leading and lagging indicators would work best together, not alone.
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