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Many forex traders use technical indicators as part of their technical analysis toolbox.
We’ve gone through the two types of technical indicators based on the timing of the signals they provide.
Here’s a quick recap of what we discussed in the previous lessons:
There are two types of indicators: leading and lagging.
- A leading indicator or an oscillator gives a signal before the new trend or reversal occurs.
- A lagging indicator or trend-following indicator gives a signal after the trend has started.
Leading Indicators
Leading indicators are typically oscillators.
They are considered leading because these indicators give you a signal before the potential trend reversal actually occurs.
An advantage of leading indicators is that they can put you into a potential reversal early.
A disadvantage is that oscillators provide many false signals.
Leading indicators don’t make good standalone tools. You should combine leading indicators with other tools such as Japanese candlestick patterns classic chart patterns, and support and resistance.
If you’re able to identify the type of market you are trading in, you can pinpoint which indicators could provide helpful signals and which ones are worthless and to ignore.
Popular leading indicators are the Stochastic, the Relative Strength Index (RSI), Williams %R, and the Momentum indicator.
Lagging Indicators
Lagging indicators are also known as trend-following or trend-confirming indicators.
Trading signals of the lagging indicators come after the event has occurred on the chart.
A disadvantage of lagging indicators is that they put you in the trade fairly late. This means that you will typically miss a relatively big part of the price move.
Popular lagging indicators are Moving Averages (Simple, Exponential, Weighted), Parabolic SAR, and the Moving Average Convergence Divergence (MACD).
So, how do you figure out when to use oscillators or trend-following indicators, or both?
That’s another million-dollar question! After all, we know they don’t always work in tandem.
We’ll give you a million dollars really soon…
Oh wait! We meant the million-dollar answer!
For now, just know that once you’re able to identify the type of market you are trading in, you will then know which indicators will give accurate signals, and which ones are worthless at that time.
This is no piece of cake.
But it’s a skill you will slowly improve upon as your experience grows.
Besides…
You’re not at it alone!
In the future sections, we’re going to teach you how to correctly identify the forex market environment you are trading into better use these indicators!
