How to Use Leading and Lagging Indicators to Drive Your Profits

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Forex trading signals use raw market to identify where the entry and exit points of a trade are located. These signals are used in both, fundamental and technical analysis.

Fundamental analysis economic news that have a direct impact on the exchange rate for a specific currency. The news for fundamental analysis can be obtained by various government reports or by using a Forex economic news feed that keeps up with the economic news worldwide.

Technical analysis, however, uses current and historical data to forecast predictable trends to assist a Forex trader on whether to enter a trade or not. Traders us different types of charts such as line charts, bar charts and candlesticks charts to determine whether to enter a trade. The signals generated by these charts can be summarized in two categories: leading indicator or lagging indicators.

Leading indicators are the most common signals used by Forex traders. In essence, a leading indicator tries to predict trend changes before these changes actually occur. By having an indicator that forecasts market movement, in an uptrend forecast, a trader can enter a trade by getting a currency at the low point the signal indicates and sell at the high point when the indicator indicates a reversal of trend. Conversely, the same is true when the indicator shows the start of a downtrend, the trader sells high in hope that the price will drop allowing him to buy at a lower price. Some of the most common leading indicators used today are oscillators like the Parabolic SAR which helps identify whether a trend is bullish or bearish. Other indicators like RSI and Stochastics are used by traders to determine whether a currency is oversold or overbought. When one of these indicator show that a currency is overbought, you should be selling. The opposite is true if the indicators show that a currency is oversold, the logical conclusion is that the price of the currency is about to reverse itself and you should be buying.

Lagging indicators are the total opposite of leading indicators. Lagging indicators produce signals to indicate a change in a trend after the change occurred. Why use a lagging indicator if you already missed the trade? The lagging indicator should work as wake up call that the trend changed and to be alert for a reversal. This is specially useful when you are starting to trade because lagging indicators never give out wrong signals. They only show signals after the change of trend occurred and it can help you tune your skills by helping you determine where you missed the leading indicator signal which would have happened prior to the lagging indicator. An example of lagging indicators are momentum indicators.

Leading and lagging indicators provide signals to assist a trader on whether to enter or exit a trade, however, these two indicator types may provide conflicting signals at times. By using several indicators you increase your probability of succeeding in a trade. However, if you don’t feel comfortable reading charts, there are many products in the market today that provide signals that have been tested and proven to be successful and you should consider getting one of these products as you fine tune your chart skills.

Source by Luis Nieves

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