There are many different indicators that are created in order to help in trading in the Forex market. Most of them can be grouped into two categories – leading indicators and lagging indicators. Both categories of indicators have their own characteristics, and understanding their differences will help you to become a more profitable trader.
Leading indicators tell you what the market is going to do before he does it. Not bad, right? All you need is to place the leading indicator on the chart and, using its signals, earn a lot of money! Of course, you know that this is not so simple. The problem with leading indicators is that they usually give out a lot of false signals. They rely on the past prices to predict the future, and many times turn out to be wrong.
Leading and lagging indicators
Therefore, you must use other clues that will help to filter out the false signals. Examples of leading indicators include Stochastics and the Relative Strength Index (RSI). Both of them have overbought and oversold zones, which tell us when the market is about to turn around. Using “filters”, such as, for example, Japanese candles, you can avoid false signals.
Delayed indicators tell you about what you already know. A good example is the moving average. It shows that the market is in a trend. But this is already a little outdated information, since before the moving averages show it, the market will already be some time in the trend. Does this mean that the lagging indicators are absolutely useless? Of course not. You can use them to check the ongoing trends, and they can act as “supports” and “resistances”.