A question came up recently on the Trade2Win forum about what indicators are leading and what are lagging. This isn’t the first time a discussion on that subject has come about, so I thought it would be worth taking a bit of time to expound upon here too.
By definition, any indicator which uses historical data is a lagging indicator. A moving average is a lagging indicator. Stochastics and RSI and Bollinger Bands and just about any other technical indicator you can think of are lagging because they primarily rely on historical data. The larger the look-back period, the longer the lag – meaning a 10 day moving average has a larger lag than a 5 day one.Â
On top of that, some indicators introduce a lag on top of a lag. The MACD indicator is a perfect example of that. It’s uses a moving average of the difference between two moving averages.
Lag aside, however, the idea is that we’re looking for tools which allow us to develop a probablistic view of the future, which you could call a leading indication, I guess. If you can use an inherently lagging indicator like RSI, or a chart pattern, to create a statistical trading edge then they are leading indicators as far as you are concerned, and that’s all that really matters.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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