In the world of forex technical analysis, indicators are very important. They are used by all technical analysts in their day to day attempts at predicting market direction. The technical indicators are divided into two major categories, which are: the Leading indicators (oscillators) and the Lagging indicators (momentum). In this article, we take a look at the positives and negatives of using both types of indicators.
Lagging forex indicators
With lagging or momentum indicators, the forex trader is basically watching to see if a currency pair is overbought or oversold. The indicators are usually designed to reflect the rate of change in price on a chart. High momentum shows that the currency is overbought, while low momentum shows oversold.
These indicators can be used in picking buy and sell forex opportunities. When the market is oversold and starts going back up, the forex trader enters a buy order. The opposite applies for a sell order.
Lagging indicators signal a trend change when it is already well and truly underway. This makes it rare for traders to enter trades in a fake breakout. Secondly, while using a lagging indicator, the majority of trade signals generated go on to become trends that yield large profits.
Lagging indicators can be likened to anti-virus software that only warns you about the presence of the virus after it has already infected your computer. This means that, on many occasions, you miss the chance to get in early on positions. Even if the position gives you some profit later on, the truth is that you could have had much more. Again, signals from lagging indicators often happen when the forex trend has gone into a retracement.
Leading Indicators (Oscillators)
These indicators are those that get you into the market very early. They are looser in the way they follow market movements, so it is easy for them to sniff out changes before any other indicator does.
These indicators help traders get into trends at the very start of it. There may be a few pips’ difference but, generally, trade signals are generated early. Since they generate signals early, they equally signal exits early enough, thereby saving the trader from giving back the majority of his profits to the market.
The biggest advantage with using leading indicators is probably also their biggest disadvantage. Since trade signals are generated very early, fake signals are very common. Secondly, many traders have lost their trading accounts using these indicators on low timeframes, as the whipsaws are more pronounced on those timeframes.
In summary, the best way to use these indicators is to avoid using them as standalone tools. This is true especially for leading indicators. It is advisable for you to have filters that will help you weed out bad entries. There are custom-made indicators that you can pull off the web for this purpose, like the GANN SSL indicators or the Ichimoku Clouds. If you use any of these indicators as standalone, you are guaranteed a loss of trading capital at some point or the other.
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