“Lagging Indicators

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

  Watch our Videos on YouTube


> Should you find this article and video useful share so you can help your friends too. Click the like button and the subscribe button to our YouTube channel  so in the future, you can be notified when we upload more useful free educational videos to watch.

<Last updated 18.04.2020>

Dear reader,

Hi! If you are interested in Forex please read carefully the below article that shows how you can make use of the various analysis tools developed for trading platforms and specifically technical indicators in this case.

 

We categorize technical indicators into one of two categories:

A) Leading indicators or oscillators.  A leading indicator gives a signal before the new trend or reversal occurs.

B) Lagging or trend-following indicators.  An oscillator is any object or data that moves back and forth between two points.

A lagging indicator gives a signal after the trend has started and basically informs you.

 

Lagging Indicators

 

Moving Average

The Simple Moving Average (SMA), the most popular technical analysis tool. It is often used to identify trend direction but can be used to generate potential buy and sell signals. The simplest type of moving average in analysis.

Example:

If you were to plot a 5-period simple moving average on a 30-minute chart, you would add up the closing prices of the last 150 minutes and then divide that number by 5. Because you are taking the averages of past price history, you only see the general path of the recent past and the general direction of “future” short-term price action.

The longer period you use for the SMA, the slower it is to react to the price movement. With the use of SMAs, we can tell whether a pair is trending up, trending down, or just ranging.

NOTE: Simple moving averages can be distorted by shocks. From one-time event caused by the poor results of an economic report, the direction of the price/trend is poorly indicated.

Gives greater weight to more recent prices.

To correct this Exponential moving averages (EMA) give more weight to the most recent periods. Helps more in smoothing out price action by filtering out the “noise” from random short-term price fluctuations.

Example: If price action tends to stay below the moving average, then it indicates that it is in a DOWNTREND.

FALSE INDICATION

As it turns out, traders just reacted to the news, but the trend continued, and price kept heading lower!

 

Alligator Indicator

The Alligator is used to confirm ongoing trends and their primary direction

This trend-following Alligator indicator follows the premise that financial markets and individual securities trend just 15% to 30% of the time while grinding through sideways ranges the other 70% to 85% of the time.

The Alligator indicator uses three smoothed moving averages, set at 5, 8 and 13 periods, which are all Fibonacci numbers. The initial smoothed average is calculated with a simple moving average (SMA), adding additional smoothed averages that slow down indicator turns.

> Jaw (blue line) – starts with the 13-bar SMMA and is smoothed by eight bars on subsequent values.

> Teeth (red line) – start with the eight-bar SMMA and is smoothed by five bars on subsequent values.

> Lips (green line) – start with the five-bar SMMA and smoothed by three bars on subsequent values.

The indicator applies convergence-divergence relationships to build trading signals

The Lips crossing down through the other lines signals a short sale opportunity while crossing upward signals a buying opportunity.

 

Average Directional Index – ADX

The average directional index (ADX) is a technical analysis indicator used determine the strength of a trend.

The trend can be either up or down, and this is shown by two accompanying indicators, the Negative Directional Indicator (-DI) and the Positive Directional Indicator (+DI)

The price is moving up when +DI is above -DI, and the price is moving down when -DI is above +DI.

Crosses between +DI and -DI are potential trading signals.

The trend has strength when ADX is above 25. The trend is weak, or the price is trend-less when ADX is below 20.

 

When the +DMI is above the -DMI, prices are moving up, and ADX measures the strength of the uptrend.

When the -DMI is above the +DMI, prices are moving down, and ADX measures the strength of the downtrend.

Calculate +DM, -DM, and True Range (TR) for each period. 14 periods are typically used.

> Use ADX readings above 25 to suggest that the trend is strong enough for trend-trading strategies. When ADX is below 25, price enters a range. When ADX rises above 25, price tends

to trend.

 

The ADX indicator works best when used in combination with other technical indicators such as the RSI. The ADX indicator can only help us to gauge the intensity of the trend. We need to RSI indicator for entry signals.

 

Parabolic SAR is a lagging indicator, which means it follows price action. Thus, it’s a good idea to use PSAR with leading indicators like RSI. A popular indicator that is mainly used by traders to determine the future short-term momentum of a given asset.

Identifies potential reversals in the market price direction of traded goods. Highlights the direction an asset is moving, as well as providing entry and exit points. The technical indicator uses a trailing stop and reverse method called “SAR,” or stop and reverse, to identify suitable exit and entry points.

The parabolic SAR indicator appears on a chart as a series of dots, either above or below an asset’s price, depending on the direction the price is moving.

When the dots flip, it indicates a potential change in price direction. For example, if the dots are above the price, when they flip below the price, it could signal a further rise in price. As the price rises, the dots will rise as well, first slowly and then picking up speed and accelerating with the trend.

FALSE INDICATION

It can lead to many false signals when the price moves sideways or is trading in a choppy market.

> When the dots flip, it indicates a potential change in price direction.

It is up to the trader to determine which trades to take and which to leave alone. For example, during a downtrend, it is better to take only the short sales.

 

Bollinger Bands

They are a lagging indicator. This is because the tool is based on a simple moving average, which takes the average price of several price bars. Although traders may use the bands to gauge the trends, they cannot use the tool alone to make price predictions.

A technical analysis tool that does not necessarily give buy and sell signals by touching the bands. Tells us if prices are low or high on a relative basis. On the face of it, a move to the upper band shows strength, while a sharp move to the lower band shows weakness.

They are curves drawn in and around the price structure that answer the question as to whether prices are  high or low on a relative basis.

Bollinger Bands consist of a middle band with two outer bands. The middle band is a simple moving average that is usually set at 20 periods

Standard Deviation:

>Work out the Mean (the simple average of the numbers)

>Then for each number: subtract the Mean and square the result.

>Then work out the mean of those squared differences.

>Take the square root of that and done!

The Standard Deviation is a measure of how spread out numbers are.

One thing you should know about Bollinger Bands is that price tends to return to the middle of the bands. Bollinger Bands act like dynamic support and resistance levels.

* The longer the time frame you are in, the stronger these bands tend to be.

> Entry Example:


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.
Risk Warning: Trading in Forex and Contracts for Difference (CFDs), which are leveraged products involves substantial risk of loss as there is considerable exposure to risk in any off-exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of the markets that you are trading. You should carefully consider your investment objectives, level of experience and risk appetite before making a decision to trade with us. Most importantly, do not invest money you cannot afford to lose. It is possible to lose all the initial capital invested.

© HCPro Human Capital Professional Education 2018-2020 | All Rights Reserved. HCPro Human Capital Professional Education is a tradename of COME WITH ME EDUCATION LTD - Company Registration No. HE 390680.

Log in with your credentials

Forgot your details?