“Leading 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.

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<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 leading indicator gives a signal before the new trend or reversal occurs.

 

Leading Indicators

 

Relative Strength Index (RSI)

The relative strength index (RSI) is a momentum oscillator that compares the magnitude of recent gains and losses over a specified time period to measure speed and change of price movements. It is primarily used to attempt to identify overbought or oversold conditions in the trading of an asset.

Indicator Points:

  1. Compares average price change of advancing periods with declining periods.
  2. Overbought is an RSI value greater than 70%
  3. Oversold is an RSI value less than 30%
  4. The RSI will rise as the number and size of positive closes increase, and it will fall as the number and size of losses increase.

Trading Technique

The RSI falls into overbought territory (close to 70%).

> RSI goes back below 70%.

> RSI then breaks its most recent high.

As you can see in the following chart, the RSI indicator was overbought formed the rejection high that triggered the signal when it bounced lower.

Divergence: As you can see in the following chart, a bullish divergence was identified when the RSI formed higher lows as the price formed  lower lows.

This was a valid signal, but divergences can be rare.

Oversold case:

Below you can see that the RSI moved to oversold territory when price fell. An indication of a future upward movement.

 

Stochastic oscillator

The stochastic oscillator is a momentum indicator comparing the closing price of a security to the range of its prices over a certain period. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result.

Indicator Points:

1.Closing levels that are consistently near the top of the range indicate accumulation (buying pressure).

2.Closing levels near the bottom of the range indicate distribution (selling pressure).

3.Overbought = > 80

4.Oversold = < 20

 

Commodity Channel Index (CCI)

Commodity Channel Index indicator is a very common tool for traders to identify cyclical trends not only in commodities but also equities and currencies.

Indicator Points:

1.Calculates the distance between a price and its average over 20 days.

2.Overbought is a CCI value greater than +100

3.Oversold is a CCI value less than -100

 

Moving Average Convergence Divergence – MACD

Although the MACD is a lagging indicator when trading on the crossovers, it is more of a leading indicator when it is used to highlight possible overbought or oversold conditions.

Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of prices.

The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA.

A nine-day EMA of the MACD called the “signal line,” is then plotted on top of the MACD line, which can function as a trigger for buy and sell signals.

 

The MACD line (blue) is the difference between the 12-period EMA (exponential moving average) and the 26-period EMA.

The average or signal line (red) is a 9-period EMA of the MACD line. The bar graph or “histogram” shows the divergence of these two lines.

 

MACD True triggers technical signals when it crosses above (to buy) or below (to sell) its signal line. The speed of crossovers is also taken as a signal of a market is overbought or oversold.

The default indicator displays the traditional MACD line as a bar graph. The signal line is displayed normally, but there is no bar graph or “histogram” showing the divergence between the MACD and the signal line.

Positive Divergence – Price is making lower lows while the indicator is making higher lows. This shows lack of momentum to the downside.

 

Negative Divergence  – Price is making higher highs while the indicator is making lower lows. This shows lack of momentum to the upside.

 

FIBONACCI RETRACEMENT

Fibonacci retracement is a method of technical analysis for determining support and resistance levels. Fibonacci retracement levels are leading indicators.

Fibonacci Retracements are ratios used to identify potential reversal levels. These ratios are found in the Fibonacci sequence.  (0, 1, 1, 2, 3, 5, 8, 13, 21…)

It is created by taking two extreme points (usually a major peak and trough) on a chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.

The Key point here is to identify where the shock or trend stops. That’s the 100% level. Then the market will retrace back to the previous level of 61.8% of the move and even further.


 

“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.
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