Leading vs. Lagging Indicators
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Technical Indicators Working Together
Now that we know what the technical indicators are, it’s time to look at how they work together and see if we can draw any general rules from them. We can divide them into two basic types, leading and lagging indicators. As the name implies, leading indicators give signals before a trend changes, while lagging indicators let us know that a change has occurred.
Jimmy Cash had the hardest time trying to see the use of the lagging indicators. He could understand the importance of leading indicators easily enough. He naturally gravitated in that direction because of his desire to be the first one to jump on a new trend. It took a few times, but he finally managed to get enough experience to see how lagging indicators could weed out false positives and incorporate them into his trades.
Leading indicators set you up for a potential trend reversal, and lagging indicators confirm when it’s actually happened. Leading indicators are often called oscillators, while lagging indicators are also known as momentum indicators.
Now, let’s start with the leading indicators and see what they can do for us. For this exercise we’re going to use EUR/USD data from 2007. We’ll start with a basic candlestick chart and then follow it with two leading indicators so we can compare what they predict against what actually happened.