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Leading and Lagging Indicators – 2 Different “Species”


Leading and lagging indicatorsThe IQ Option platform has a variety of indicators in its offer. The traders are using the indicators to identify the entry points better. Generally, we can distinguish two groups of these technical analysis tools, the leading and lagging ones. How do they differ and which indicator type should you choose? Continue reading and you will find the answers.

How do leading and lagging indicators differ?

Introduction to lagging indicators

Lagging indicators are based on the past price. You have to expect a small lag in the information provided by them. This is why they are called lagging tools. It looks like this: you notice a good moment to enter the trade on the price chart. After a short while, the lagging indicator will confirm the opportunity to open a position. The opponents of this type of indicator will say such a delay is a loss of precious time. The supporters argue this is a necessary sacrifice to have confidence about the best entry point.

Some of the most common lagging indicators are Simple Moving Average, Relative Strength Index, Stochastic Oscillator or Moving Average Convergence Divergence.

SMA follows the price forming tops and bottoms with delay
The SMA follows the price forming tops and bottoms with delay

Leading indicators' specification

Leading indicators also rely on past price. The difference is that they provide signals for the near future. So a trader first gets the signal, then see an awaited situation on the price chart and after that is able to open a transaction at the exact moment when the situation occurs. The supporters say this is very important they receive a signal beforehand. The opponents argue, that the signals are for the future and so they can be often false. The situation on the market can change abruptly and the predictions are not as strong as confirmations.

In this group of indicators, you will find such tools like Fibonacci retracements, Donchian channels and support and resistance levels.

Leading indicators such as support-resistance help to find market turning points
Leading indicators such as support/resistance help to find market turning points

What are the pros and cons of leading and lagging indicators?

Lagging indicators

The advantage of the signals received from this type of indicators is that they are strong as they are presented after an actual situation occurred. Moreover, there is a low risk of false signals involved. This means you have great chances to conduct successful operations with them.

The disadvantage is the delay which is a part of how the lagging indicators work. Because of this short waiting period, the traders may lose some pips. And there is no key levels' identification here.

Leading indicators

The advantages are a lack of delay and detection of key levels. Thanks to them the traders are ready to open a transaction just on time and can target higher probability trades.

The disadvantage is that the leading indicators produce sometimes false signals as the situation on the market is very volatile. And they can be a little bit difficult to use by the beginners as they are often applied in more advanced analysis.

Fibonacci retracement often indicates where the trend is going to change
Fibonacci retracement often indicates where the trend is going to change

How to choose the best indicator for your trading operations?

This question must be answered individually. Both groups of indicators have some advantages and disadvantages. You should be aware of them and make the best decision for your own trading skills and style.

The lagging indicators are a safer option so they are recommended at the beginning of the trading journey. Further, they work better for the positions that are open for a longer time.

And if you are a professional who wants to get a signal fast and ahead of time, you may opt for the leading indicators. To secure your investment you can always set a stop loss.

Summary

It is a wise thing to know your options. So you should learn about both, leading and lagging indicators, and make the decision based on your own preferences. Some traders will be surely tempted to try the leading indicators so they do not waste the time waiting. But remember about the higher risk that is connected to using this type of tools.

You may want to try some combinations. Like this, you will receive a confirmation for your trades. You can, for example, mix the Stochastic Oscillator with support and resistance levels.

Do not forget you can try leading and lagging indicators on the IQ Option practice account. The account is credited with virtual cash so you do not risk losing your own funds. You can use it as long as you need to, till you find out which indicators suit you best. Then, you should shift to the live account so you can start making profits.

I invite you to write your thoughts about different indicator types in the comments section which you will find further down the site.

Best of luck!

 

 

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Bart Bregman

Fulltime Day trading, and help Iq option wiki in my spare time to build an awesome platform to help beginners out there. #digital nomad, traveling all over the world.

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