Do you know that the forex indicators are categorized into 2 main groups namely lagging and leading.
A lagging indicator usually shows you something that has already happened. Imagine you are using the lagging indicators to tell the trend of the market. By the time it signals to you that the trend is UP, the trend has already began and you are already in it causing you to miss the chance to ride the trend at the very beginning.
In this post, I will be focusing on lagging indicators and I will then talk about the leading ones in my next post.
Examples of lagging indicators are
These 2 indicators can only be used to help you identify trends that has already established.
From the above picture, the trend is UP when the faster moving average cuts above the slower moving average. Similarly, when there is bullish MACD crossover, it is also a sign that the trend is UP.
You may be thinking in your mind now that you will be able to spot the start of a trend at the very beginning using the leading indicators and all you have to do is to ride it to profit.
I will tell you that the answer is partly YES and NO.
Yes, the leading indicator will be able to tell you when a trend is starting so that you can profit from it but they usually produces a lot of false signals known as fake outs which is the number one killer of new traders. If you are going to trade with the signals, you may get more losses than wins.
Although the lagging indicators can only tell you the trend when you are in it, it is more reliable and do not produce much false signals. Therefore most traders will choose to use a combination of both lagging and leading to help them in their trades.
To find out more about the leading indicators, stay tune as I will be writing a post on it next week.