Types of Indicators: Everything You Need to Know

Technical market Indicators are introduced by the world's successful traders. The cornerstone of technical analysis is the technical analysis indicator.

There are various types of indicators available in the financial market like momentum, trend, confirming, tape indicator, and many more. All these indicators are classified into two categories:

  1. Leading Indicator
  2. Lagging Indicator

Leading Indicator: An indicator that might predict future success. A leading indicator forecasts future outcomes and events.

Leading indicators utilizes past price data to forecast future price action in the market

Properties of Leading Indicators

  1. Leading indicators usually use shorter periods to predict price.
  2. Leading indicators used for entries.
  3. It is used to evaluate the strength and weaknesses of the financial market.
  4. Leading indicators typically identify whether the market is overbought or oversold. This information helps the traders to make their entry or exit points.
  5. No indicators are perfect in their prediction. Following them blindly leads to massive losses, which is why experienced traders frequently mix leading indicators with other types of technical analysis.
  6. A majority of leading indicators are called oscillators as they oscillate with a bounded range (0 to 100).
  7. Examples of Leading indicators :
    1. Fibonacci retracement
    2. Donchain channels
    3. Support and resistance levels
    4. Client sentiment
    5. Williams %R

Lagging Indicator: An indicator that measures how the market performed in past. A lagging indicator looks back at whether the desired outcome was attained

Imagine you have a car. Leading indicators are those that gaze forward, through the windshield, at the road ahead of them. Lagging indicators glance backward, out the back window, at the road you've previously driven.

Leading indicator "Leads to" Lagging indicator

Properties of Lagging Indicators

  1. Lagging indicators are used to evaluate the strength and weakness of the financial market.
  2. It is used to analyze the overall picture.
  3. Best to filter out noise.
  4. Provide the idea of the trend.
  5. Confirms recent price action.
  6. Reduce the risk of failed moves or false breakout.
  7. Leading indicators utilize past price action data.
  8. These indicators are used to confirm the current direction and strength.
  9. Great tool in the trending market.
  10. Great tool in high volatility.
  11. Examples of Lagging indicators :
    1. MACD
    2. Simple Moving Average (SMA)
    3. Stochastic oscillator
    4. Relative Strength Index (RSI)

The ideal trading strategy is to mix both Leading and Lagging indicators. Using one set to predict the market movement and the other set to confirm it

Checklist for Indicator

  1. There should be an obvious candlestick pattern
  2. S & R should confirm the trade
  3. Volume must be higher than other days
  4. Indicator should clearly show buy or sell signal

If any of the above points are not valid then look for other opportunities. Don't expose your money to others unnecessarily.

You can create an indicator on your own. The goal is to predict future price movement. Firstly determine the components you want to include in your indicator. Add a set of rules if necessary, then test your indicator in the real market through backtesting. If its win to loss ratio is good then put it to use.

Later in this course, we'll look at an example of how to make your own indicator.

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