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 14.09.2019

*AAKASHAYA PATRA SEVEN STAR SMART EDUCATION SERIES PART – 25 :*
Leading and Lagging Indicators

A Technical indicator is a mathematical formula applied to the security‘s price, volume or open interest. The result is a value that is used to anticipate future changes in prices.A technical indicator is a series of data points derived by applying a formula to the price data of a security. Price data includes any combination of the open, high, low or close over a period of time. Some indicators may use only the closing prices, while others incorporate volume and open interest into their formulas. The price data is entered into the formula and a data point is produced.

Difference between the Indicator and Oscillators

Technical indicators are tools that provide to traders an indication about the movement or direction of the stock or commodity. These indicators are generally used as additional information before one takes a decision to buy or sell a share. They provide unique perspective on the strength and direction of the market. Indicators are based on the price data and volume of a stock that measure such things as money flow, trends, volatility etc.
An oscillator is an indicator that fluctuates above and below a center-line or between set levels as its value changes over time. Oscillator indicators have a scale- 0 to 100 or -100 to 0. Non-bounded indicators still form buy and sell signals along with displaying strength or weakness, but they vary in the way they do this.

What Does a Technical indicator offer?

Technical analysts use indicators to look into a different perspective from which stock prices can be analyzed. Technical indicators provide unique outlook on the strength and direction of the underlying price action for a given timeframe.

Why use indicators?

Technical Indicators broadly serve three functions: to alert, to confirm and to predict.
Indicator acts as an alert to study price action, sometimes it also gives a signal to watch for a break of support. A large positive divergence can act as an alert to watch for a resistance breakout. Indicators can be used to confirm other technical analysis tools. Some investors and traders use indicators to predict the direction of future prices.

 There are a large number of Technical Indicators that can be used to assist you in selection of stocks and in tracking the right entry and exit points. But it doesn‘t mean that traders should ignore the price action of a stock and focus solely on the indicator.
 Indicators are derivatives and not direct reflections of the price action.
 While applying the indicators, the analyst should consider: What is the indicator saying about the price action of a security? Is the price action getting stronger? Is it getting weaker?
 The buy and sell signals generated by the indicators, should be read in context with other technical analysis tools like candlesticks, trends, patterns etc.
 For example, an indicator may flash a buy signal, but if the chart pattern shows a descending triangle with a series of declining peaks, it may be a false signal.
 It is best to focus on two or three indicators and learn their intricacies inside and out.
 One should always choose indicators that complement each other, instead of those that move in unison and generate the same signals.

Types of indicators

Indicators can broadly be divided into two types ―LEADING and ―LAGGING.

Leading indicators

Leading indicators are designed to lead price movements. Benefits of leading indicators are early signalling for entry and exit, generating more signals and allow more opportunities to trade. They represent a form of price momentum over a fixed look-back period, which is the number of periods used to calculate the indicator. Some of the well more popular leading indicators include Commodity Channel Index (CCI), Momentum, Relative Strength Index (RSI), Stochastic Oscillator and Williams %R.

Lagging Indicators

Lagging Indicators are the indicators that would follow a trend rather than predicting a reversal. A lagging indicator follows an event. These indicators work well when prices move in relatively long trends. They don‘t warn you of upcoming changes in prices, they simply tell you what prices are doing (i.e., rising or falling) so that you can invest accordingly. These trend following indicators makes you buy and sell late and, in exchange for missing the early opportunities, they greatly reduce your risk by keeping you on the right side of the market. Moving averages and the MACD are examples of trend following, or ―lagging indicators.


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