Forex Trading Leading Indicators

Lagging vs. Leading Indicators - Key to Successful Forex Trading

No matter what type of market you are trading (forex trading, stock trading, or futures trading etc) there are two types of indicators and analysis that you perform: lagging and leading. Lagging indicators/analysis will tell you what has happened in the past (1 minute ago, 5 minutes ago, one hour or one month ago). A leading indicator/analysis will attempt to tell you what the market will do in the future.

Lagging Indicators

In my personal opinion trading with leading indicators is in many cases the difference between success and failure in the business of forex trading (or any market you trade for that purpose). I do not have an accurate statistic of this but I do know that many if not most traders use lagging indicators in their forex trading system(s) or method (s). Now, don't get me wrong. Some are successful by doing this but I know more that are not.

A simple example of a lagging indicator is any type of moving average. Integrating a moving average in a forex trading system or method simply shows the trader the average price of a market at any point in time. There are various ways to calculate a moving average (simple, exponential, of the open price, of the closing price etc). But the concept remains the same: the average price of the market you are trading during the last X bars. The problem with this is that you know how the market has been behaving until now but nothing is being revealed to you as to future market behavior. Markets, no matter what type, have mainly two modes; either they trend or they are in range. The moving average will most likely tell you that a trend has already started (in most cases making it to late to join) or that the market has ranged (in most cases making it to late to use range trading strategies).

An example of a leading indicator is a Fibonacci reaction level. A fib level will most likely tell you what the market might be doing in the future in terms of support and resistance. It helps you prepare your trading plan with advanced knowledge of what will happen rather than what has happened. Knowing likely levels were the market might stop after a reaction is powerful information. For example, this allows the forex trader to know if the trend has ended or maybe pin point a good entry level within a reaction with the objective of joining a trend. No matter how fib levels are used, the idea is the same – knowing in advance how the market will behave in the future.

In conclusion, as traders we have to always keep an open mind and experiment when testing a forex trading system or strategy. I believe that there is not one single secret formula that makes a person a successful trader. What brings success in this game is having an advantage over the competition. And trust me, even a small advantage is all it takes to be light years ahead of over 90% of traders!

I wish you all the best in your forex trading endeavors!
Avi