Lagging Leading and Confirming Indicators Explained - Part 2
Posted on February 08, 2012
Lagging Indicators are also known as trend following indicators. They often uses a longer period of price action making them lagging compare to the Leading Indicators, hence the 2 different categories despite the fact all indicators are lagging. They are often used to smoothen out price and filter out noise. This helps the trader to keep an eye on the big picture. The Indicator also helps the trader to identify the trend as it incorporates more price action then the Leading Indicators. It's also designed differently so it does not oscillate between fixed values. The most common Lagging Indicator is the Moving Average
Leading Indicators tries to lead price movement by putting more weight to the most recent price action. They often represent a form of momentum such as a momentum oscillator. The Technical Indicator measures the rate of change and then uses this in its formula to then generate a number which is then plotted on the chart. These Leading Indicators are mainly used to identify overbought/oversold areas as the Indicator is often banded between 0 and 100.
There are obviously pros and cons by using these Leading Indicators. As mentioned earlier the pro is that the Technical Indicator tries to get you in early on. It also gives you more entry signals than the lagging indicators as it does not uses so many periods in its calculation. The con is that there will be more false signals. Some of the most popular Leading Indicators are Stochastic, Relative Strength Index (RSI) and Commodity Channel Index (CCI)
Confirming Indicators, as the name suggests, were created to confirm a move by looking at volume. As every trader should know, the volume increase supports a price move so this Technical Indicator incorporates volume with price to give the trader the confirmation that the uptrend or downtrend is supported not only by price but volume as well. This is used to provide the trader with higher odds trades as it will weed out fake trends. The most used Confirming Indicator is on Balance Volume.
In our next lesson we will look at how you can use Lagging Indicators in your trading.
Leading Indicators tries to lead price movement by putting more weight to the most recent price action. They often represent a form of momentum such as a momentum oscillator. The Technical Indicator measures the rate of change and then uses this in its formula to then generate a number which is then plotted on the chart. These Leading Indicators are mainly used to identify overbought/oversold areas as the Indicator is often banded between 0 and 100.
There are obviously pros and cons by using these Leading Indicators. As mentioned earlier the pro is that the Technical Indicator tries to get you in early on. It also gives you more entry signals than the lagging indicators as it does not uses so many periods in its calculation. The con is that there will be more false signals. Some of the most popular Leading Indicators are Stochastic, Relative Strength Index (RSI) and Commodity Channel Index (CCI)
Confirming Indicators, as the name suggests, were created to confirm a move by looking at volume. As every trader should know, the volume increase supports a price move so this Technical Indicator incorporates volume with price to give the trader the confirmation that the uptrend or downtrend is supported not only by price but volume as well. This is used to provide the trader with higher odds trades as it will weed out fake trends. The most used Confirming Indicator is on Balance Volume.
In our next lesson we will look at how you can use Lagging Indicators in your trading.