Workability of Trading Indicators with a Detailed Overview of Leading and Lagging Indicators

by SAM. M
Best Trading Indicators in Forex | FX Investing Index

Forex trading has become the biggest and the most popular trading market in the world these days.  People from every corner of the world are investing their money in forex trading right now. They are taking forex education and learning all the ins and outs of the forex market. Trading indicators are also a part of their forex education. You just can’t get success in the forex market just by gaining knowledge. You will require to get some techniques and shortcuts too. This is where the indicators play a vital role for the forex traders. If you are acknowledge of how to define lagging indicators and leading indicators, then you will have an upper-hand on using lagging and leading indicators.  But still, there is a question on the workability of the indicators in the forex market. There is always a debate on this topic happening in the forex market nowadays. Some of the traders will claim indicators are an oracle which helped them in generating huge profits in the forex market consistently. On the contrary, some people will deny that and tell you indicators are just hoaxes, it doesn’t work as well as a complete waste of money and time. But according to us, both of these discussions are wrong. Therefore, here we will be providing you a detailed overview of indicators so that you can have a clear view of their workability as follows:

Indicators

Let’s start our discussion with indicators. In the forex market, most professional traders and brokers use tools so that they can help them make the right decisions in the market and get their job done properly. Trading indicators are just like those tools which traders have at their disposal. Indicators are just like those trading tools such as news, forex charts, order books, etc. So, the idea of considering indicators as an oracle of generating money is wrong. They are no machine to make you money. They are just mere tools by which you can make profits if you can use them properly. Utilization is very important with the indicators. If you can’t use it properly with your trading style, then it will certainly be a waste of money and time for you. But that doesn’t make them a hoax because it would be your inability that you can’t use them properly to make profits.

As we all are aware of the fact that a single tool can’t get all our jobs done single-handedly. Instead, we need to make a proper combination of various tools to get our job done. As we also know, different tools will require different conditions and situations to perform well. Therefore, you just can’t make a combination of tools and expect them to work well. You need to put them in the right condition and wait for the right situation to perform at its best for you. All these things easily go for the trading indicators as well.

Though some indicators have the ability to function perfectly in a nicely trending forex market with the help of clear reversals in the price of the trends now and then. But the same indicators may give you disastrous results when the market turns into a choppy one. A regular indicator would be the moving indicator here and it is mostly used by the trend-following traders. But it would be notorious and destructive in the choppy market for giving false signals.

If we take other indicators for example RSI (Relative Strength Index) can provide you some clues regarding the oversold or overbought market. Thus it can help you as a trader by predicting the price reversals. However, during the strong trends, it is expected that the forex market can stay in the overbought phase according to the RSI for a very long time.

You should already have the idea that it is not very simple to just say this indicator works, while the other one doesn’t. In reality, all the available indicators work sometimes under some conditions and don’t work at other times. Sorry to say, but the imaginary indicator which can consistently generate huge profits under any market conditions isn’t discovered yet. And if you still insist on its existence, then it should stop working the moment people learned about it.

Therefore, best trading indicators only work when you have a clear idea about how and when to use them. And to learn that, you need to understand all the differences between the indicators. As some indicators are considered to be leading the price movements, while others are lagging. Now we will get an insight into them as well.

Leading Indicators

If you believe the whole point of forex trading indicators are to get in before the arrival of a new trend or the development of a new trend, then leading indicators trading is the ideal choice for you. Leading indicators trading does not just look at the price movements in the market rather they do other activities as well. Because we are all aware that these are not good predictors for future price action.

The RSI leading indicators and Stochastic leading indicators are both referred to the traders as oscillators. They are also thought of as the best leading indicators along with the other available oscillator indicators. These indicators can provide you a signal about the change in trend direction before it happens. Therefore, they are known as the leading indicators. They make it happen by having a look at the momentum of the current trend. They place their prediction on whether the trend is strengthening or weakening.

If you are having a question in your head about why not using these two leading indicators, then here is your answer. Although leading indicators have the ability to provide signals about any change in the trend direction, yet it doesn’t work all the time. In other words, they are prone to false and wrong signals, which is why you can’t rely upon these indicators all the time. And these best leading indicators must be used with proper caution as well.

However, there are several strategies that we can use to filter out many of these false and wrong signals and it will certainly bring you over to the lagging indicators.

Lagging Indicators

You may have already guessed from the name that lagging indicators are those indicators that lag behind the price movements in the forex market. People also know these indicators as the trend-based indicators. They can easily guide you on whether the market is trending or not. This is the reason why they are called “trend-based indicators”.

However according to lagging indicators definition, you will only get a signal from a lagging indicator when the new trend is already formed. It would make it impossible to catch the exact bottoms and tops in the forex market. You should be targeting the middle chunk of the price movement which happens between a top and a bottom.

A very interesting way to use lagging indicators is a way to confirm the signals from one of the recognized leading indicators. When you will get a buy signal from leading indicators, then you could wait for the same signal from lagging indicators so that you can confirm that signal, which would also show that the trend in the forex market is indeed up as per the lagging indicators definition.

Following this way, you will be able to eliminate the risks of having false signals provided by the leading indicators. As you are waiting for getting the confirmation from a lagging indicator, you will not take any given false signal by a leading indicator. If you can follow this way perfectly, you can end up combining different types of best trading indicators which will have the potential of delivering some strong and powerful trading strategies and these strategies will work no matter for what purposes they are intended for.

Among the most popular lagging indicators list, there is the MA (Moving Average) indicator which we already discussed above. Some other common indicators in lagging indicators list are MACD (Moving Average Convergence-Divergence) and the BB (Bollinger Bands).

Wrap Up

Moreover, we need to keep in mind that there is no such a holy thing in forex trading which guarantee profits to the forex traders. Instead, there are several trading indicators available that have their level of strengths and weaknesses. But you have to keep in mind that while some of them may perform well at specific times, they may also completely fail at different times. So, the best way to use these technical trading indicators is to combine different types (in particular lagging and leading indicators) to establish a robust trading strategy that will help you filter out the false signals as much as they possibly can. You will stand the opportunity of giving yourself an upper hand in the forex market by doing that because your strategies will be based on statistical probabilities rather than any gut feeling and luck.

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