Greetings Traders from all around the world.
Thank you for joining me yet again.
Chris here, bringing you another in-depth with Chris episode
where today we are going to cover leading and lagging indicators.
It's my pleasure to bring this to those of you that are aspiring
technical analysis traders to let you know what the different
options out
there are as far as the categories of indicators.
So without further adue let's dive on into it
and talk about what those are as well as provide some examples
at the end of all of this where I'm going to ahead and
apply some of the indicators, the most common of either category,
to a live chart so you can see exactly what they look like.
So the "indicator" itself. the word "indicator".
What is that?
An indicator is a tool that is used by technical analysis
traders to manipulate and mold price data into a potentially
more digestible manner by generally using some type of mathematical
formula with the goal of giving the trader an edge while
they forecast market direction.
So the long story short: It's just different tools that we
use to help interpret what we are seeing on our charts in
an easier manner to get us ahead of the competition.
Now we have a visualize leading page that I wanted to bring
you guys with an image here to show you just what a leading
versus lagging indicators scenario would look like in relation
to price just to understand the concept here.
So with a leading indicator, if we work on visualizing this,
the lighter gray line is going to represent the indicators
read on price in regard to what price is going to do, potentially.
So as we see here, the price trajectory as the indicator
is providing us, is actually going up here.
So we see this going up on the indicator before price itself
actually has risen. It shows it going up and actually dumping
then before price has actually began dumping over here, as
you can see, and this gives us that predictive nature and,
as such, the name of leading was more or less coined to leading
indicators. It's the idea that this type of an indicator
will provide us some insight into what is about to happen before
it actually happens. A rather simple concept, but it is important
to understand nonetheless.
Now if we switch on over to visualize a lagging indicator
the chart looks a little bit different.
Now remember the dark line is actually going to represent
the actual price,
hypothetically.
So we would imagine that with a lagging indicator, we'll notice
that there's actually a lag here where we are seeing the
indicator show the
rally in price after the rally has already happened.
So the indicator does actually lag behind price, and generally
the way this works, is by using historical data such as averages,
and various things that we are obviously going to talk about.
Comparatively between the two: Leading indicators
up here react to prices quickly, which can be great for short
term Traders,
but this makes them prone to giving out false signals and
sometimes this does happen quite frequently
if we don't have our p's and q's in order.
This happens when a signal indicates it's time to enter
the market, but the trend promptly reverses. We've all been
there, it's not an enjoyable
feeling. In contrast, lagging indicators are much slower to
react. This means that Traders might have more accuracy,
but could be late when entering the market. So everything
is a give and take in the trading world. With the leading indicators
we have the potential to nail a perfect trade and ride the
entirety of a trend. But with the lagging indicators, we have
a large sample size of historical information that is being
analyzed to provide us arguably,
a more accurate read on what is actually happening in
the market, but it can cause us to jump into the position
a little bit late to the party.
Now, that doesn't mean that great trades can't be found with
either of them.
Both of them can produce awesome trades, and both of them
can be failing to the trader when used incorrectly as well,
or not used in conjunction with other technical analysis,
or just common old price action.
As far as leading examples, let's take a look at a few
of these.
These are going to be the various leading indicators out
there that are some of the most common leading indicators
that you'll probably run into as you scour the web, or just
progress throughout your trading career.
Number one to get us started off with is actually going
to be the relative strength index. Short is going to be RSI,
and that's how you're going to hear most Traders talk about
this. Very rarely will someone actually say "relative strength
index" because it's a bit of a mouthful.
The RSI is a momentum indicator that attempts to key a trader
in to potentially overbought and oversold situations in the
market. When the RSI provides a signal, it is interpreted that
the market will soon reverse. This predictive nature makes
this a leading indicator by allowing traders to enter or
exit before the move occurs,
and this is the requirement of being a leading indicator;
To potentially give the trader an opportunity to get in before
the market rallies, or to get in for the sell before the market
goes on for the decline.
Taking a look at another leading indicator example, we have
the Williams Percent Range.
This is going to be one of those indicators where, once again,
you're not commonly going to see it spelled out in full. Instead,
you'll see the abbreviated version, which is right here.
So the Williams Percent Range, more commonly known as the
Williams %R, is very similar to other oscillators
with one key difference:
The %R works on a negative scale instead of a positive.
So a read would fluctuate between 0 and -100, and
this uses -20 and -80 as the overbought and
oversold signals respectively.
This means, in short, that if we were to witness it oscillate
down towards the -80 mark, we would be anticipating
the market to begin rising at some point, as it would be considered
by the indicator to be an oversold scenario. Conversely
to that, if the indicator oscillated up towards -20,
then we would be expecting some type of a decline in the
market, as the indicator is giving us a read of an overbought
scenario. Our next leading indicator example is going to
be one of the most common ones out there, and that is the
stochastic oscillator.
The stochastic oscillator is a fun one, and it is commonly
coupled with a lot of other indicator pairs out there
so it is definitely one to take note of, those of you that
are in my newer category. Last but not least, the stochastic
oscillator is based on the idea that the market momentum
changes direction much faster than volume or price, so it
can be used to predict the direction of the market movements
themselves. If the oscillator reaches a reading of
80 or over, the market would be considered to be overbought,
while anything under 20 would be thought of as oversold.
So more or less the inverse of what's going on with the Williams
Percent Range.
As we switch on over to some lagging examples, we'll find a
broader category of indicators. More indicators fall under
the lagging category
than the predictive leading category, as you'll find as you
progress throughout your trading career. Our number one
and by far and away the most common indicator, in my opinion,
that exists and has existed for quite some time out there
of either category, is going to be a moving average. Moving
averages are arguably the most used indicator on the planet.
Moving averages represent lagging indicators at the core,
as they are a line that is simply plotted on an average of
historical data. Buy and sell signals are generally created
for Traders based on shorter and longer period crossovers.
This is when the moving average just simply crosses over
another moving average. These have been around for a long
time, and this is a strategy that has been used for a long
time. And once again, some of the strategies that have survived
for as long as they have, have survived for a reason so they're
always worth paying attention to. It's not overly common for
Traders to use nothing but a moving average when trying to
generate signals, meaning they're not using any other technical
analysis or price action, but it does still happen.
Another lagging indicator example would be our Bollinger
Bands, and that is one of my all-time favorites.
The Bollinger Band is a lagging indicator naturally due to
the fact that it is based on a twenty period, simple, moving
average. The two outer bands that are also in conjunction
to that twenty period moving average, represent the positive and
negative standard deviations from the center of that simple
moving average. When volatility increases, the Bands will widen
and when the volatility decreases, the Bands tighten. So price
reaching the outside of the Bands is widely considered to
be a trigger point to expect price to return to inside the
Bands. It's said that over 90% of the time, price should be
trading inside both of those Bands,
so people get quite excited when they see price move to the
outside of either end.
Next we have things that are a curious case. And what do I
mean by a curious case?
We have indicators that almost fall into both categories.
And one of those is going to be this long-winded word here.
That is the moving average convergence divergence, which
otherwise is just simply known as the MACD. The MACD represents
a lagging histogram style indicator to some. Key word: to some.
The MACD is based on moving averages and as such, rightfully
earns a place in the lagging category.
The MACD is made up of two moving averages, signal line and
MACD line, overlaid on a histogram chart. Signals are generally
generated when the moving averages cross each other after
the trend is already in motion.
So the MACD is another indicator that uses that crossover
style of a strategy, usually at its core.
Continuing on with the "curious case", almost messed up
the question mark there, despite earning a place in the lagging
category, the MACD is also considered to be capable of being
a leading indicator as well, due to the predictive potential
of the histogram.
The histogram is sometimes considered a leading indicator,
as it is used to anticipate signal crossovers between the
two moving averages.
So the bars on the histogram represents the difference between
the two moving averages. As the bars move farther away from
the zero line,
it means the moving averages are moving farther apart.
Once this expansion is over, a bump appears on the histogram,
which is a sign the moving averages will tighten again and
a crossover might occur, touching the predictive category
as well.
So as we see with the MACD,
it has both predictive, as well as lagging properties about
it, so it is a rather curious case because depending on how
the trader chooses to use it,
you can find it in the lagging or leading category. Predominantly,
you're going to find the MACD categorized more so as a lagging
indicator. Now, let's go ahead and take a look at these on
the chart.
With the help of the finnamark platform in the e-mini S&P
500, I'm going to show you guys how to quickly apply these
indicators, as well as let you see what they look like
so you might be more familiar with them in the future.
Remember, if you're on a different platform, they may
be different to navigate to. Up here at the top,
we have the show indicator options button.
I'm going to click that right off the bat, and we'll get started
by plotting our leading indicators first.
The first one that we talked about was the RSI, and
in order to do that, because it doesn't overlay price,
we need to add a new section here on the right hand side.
After I've clicked this button and we have a second section,
I'm going to scroll down to the R's, and I'm going to click
on relative strength index. If I want to adjust any of the
settings with this indicator,
I'm going to click the cogwheel,
we won't do that at this point, and we're going to go ahead
and close it off.
And there we are.
We have an RSI and we can adjust the screen up and down as
we see fit. Next,
let's go ahead and get rid of that,
and we'll move on to the next one.
The next indicator that we talked about was the Williams
Percent Range,
so we're going to scroll down to the W's,
Williams Percent Range, go back to the main screen,
and now we have a Williams Percent Range, which is going
to be obviously a negative oscillator fluctuating generally
between a -20 and a -100.
The next one on the chopping block was going to be our stochastic
oscillator. Probably one of my favorites for the leading
category, and that's obviously going to be in the same category
down here, second section, stochastic oscillator
right there on the center screen.
I'm going to click that and here we have a stochastic oscillator
where we see a couple lines crossing back and forth over
themselves. Once again, fluctuating just like the Williams
Percent Range,
but this time with the positive numbers. Next on the chopping
block, we're actually going to flip on over, now to our lagging
indicators category,
was the moving averages. The moving averages are some of the
easiest to use indicators out there, and I'm sure many of
you are already familiar with them,
so we won't take too much time. To add a moving average,
we're going to go to the center category, because it does
overlay price, and we're going to click on simple moving average
right here.
And then we're going to go back to the main screen, and walla
we have a moving average. If we wanted to change the period,
once again, we would just click that cogwheel. The next on
the chopping block after the moving average would be the
Bollinger Bands, another one of my favorites. Getting rid
of the simple moving average and adding a Bollinger Band,
that's going to be the very top because of alphabetical order,
clicking that, and going back to the main screen.
We now have ourself a Bollinger Band where it's going to
show the outer bands, and giving us a setting opportunity
to go ahead and show the center, which is going to be what
the deviations are based off of, is usually how it's going
to be displayed.
My settings are slightly different due to my personal preferences.
Finally, moving along, we have our MACD, which was our "curious
case". In order to add the MACD,
we do still need to add a second section, and go down to the
M's, where you'll find moving average convergence divergence.
After we've added that and return to the regular screen,
you'll see the histogram with the two moving averages crossing
back and over themselves as they move along. The MACD is a
lot of fun because of its predictive, as well as lagging nature,
that it can provide to a Trader depending on how you interpret
the information.
To sum it all up,
it's important to remember that a leading indicator is just
a tool that is designed to anticipate the future direction
of the market, while a lagging indicator is a tool that gives
a signal once the price movement has already started. The
leading indicators usually react to price quite quickly,
but it makes them prone to giving out false signals, while
the lagging indicators can be more accurate, but they are
slower to react.
It doesn't matter what you choose and what you become good
with, the idea is to use what feels like it clicks with you
personally the best. It is going to be a matter of personal
preference and whatever
you understand.
the best will most likely be what you have the most success
with. But other than that, good luck everybody and happy trading.
Thank you for joining me for another presentation and make
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Thanks again guys, and happy hunting.