In technical analysis, there are two different kinds of indicators. Lagging indicators follow the price and show us how the past conditions shaped the current market situation, so they are usually used to look for and confirm strong patterns or long-term trends. Leading indicators rather help you predict trends, notice oversold or overbought areas, and anticipate possible price reversal points. In this article, we’re going to take a closer look at the latter and explain how you can use leading indicators for trading.
About leading indicators
Leading indicators are technical analysis tools that are used to calculate how fast the price changes to predict where a new trend may appear. Basically, leading indicators use shorter periods to anticipate a possible price level of a certain asset, thus ‘leading’ the price. These instruments can prove useful for confirming trends and measuring their strength as well as looking for probable points of reversal. They can be applied in various combinations to find out whether the current trend will continue or change.
While leading indicators are extremely useful, their applications are mostly limited to short periods and intraday strategies. That doesn’t mean you can’t employ them for analyzing longer intervals, but these tools seem to make more wrong signals on long-term timeframes. They are generally less trustworthy than lagging indicators, and there is also a thing called redrawing: when the formula includes the price of the current candlestick, any price change automatically redraws the graph and changes signals.
Choosing the best ones
There are several different types of them, but the best leading indicators for novice traders are just the simplest ones. It’s better to understand how just a couple tools work than to use a dozen but without a slightest idea about how they are actually calculated. Probably the most basic indicator, RSI is used to determine the speed and strength of ongoing price changes. RSI is very easy to use: if the chart goes below 30, the asset is oversold, and if it hits 70, it’s probably in the overbought zone already.
Another great leading indicator for starters is momentum. This useful oscillator shows you how quickly the price changes. You can use it to confirm signals from other indicators on any markets, even if you trade crypto. Obvious extremes on the graph are strong signals for an approaching trend reversal.
The author of the article is Oleg Tkachenko.