Types of Technical Indicators
Technical indicators are grouped into two main classifications: oscillators or leading indicators and momentum or lagging indicators. Moving averages, as discussed in the previous section, typically fall under the category of lagging indicators but the parameters can be modified or shifted to allow it to act as a leading indicator.
As the name suggests, leading indicators give trade signals when the trend is just about to start. In other words, leading indicators give early trade signals.
On the other hand, lagging indicators give trade signals when the trend is already taking place. This means that lagging indicators give confirmation trade signals.
There is no right and wrong when picking whether to use a leading indicator or a lagging indicator. Some traders decide to use a combination of both, with the leading indicator serving as an alert for a new trend and the lagging indicator acting as confirmation for a trade entry.
As you can see from the chart above, the stochastic hints that a new trend is about to take place while the MACD gives the go signal for the trader to enter a trade in the direction of the new trend.
Some argue that using only one or the other can give erroneous trade signals. After all, sticking with only a leading indicator can give false signals, telling the trader to enter a trade the moment a new trend seems to start. On the other hand, using only a lagging indicator can give late signals, with the trader not able to take advantage of the majority of the price movement or entering a trade when the trend is almost over.
At the end of the day, it is up to the trader to determine which technical indicators he is most comfortable with and which ones he thinks could yield the best returns. Trial and error is often key to figuring out which indicators and which parameters could lead to profitable results.
In the next sections, the different kinds of leading and lagging indicators will be discussed. Note that it is not important to memorize how the indicators are derived but that it is more crucial to have a clear understanding of how they work and how they can be applied to forex trading.
Next Article: Using Oscillators or Leading Indicators