there is no tool that can predict what will happen in the future.
Previous and current price behaviors are generally the only
determinants in technical analysis. For the sake of analysis,
however, technical indicators can be divided into two types:
leading indicators and lagging indicators. A leading indicator
gives us an indication or signal before an actual price reversal;
a lagging indicator gives us an indication or signal after a new
trend has started.
The first thing one needs to understand about
this concept is that trades that are based on a leading indicator
probably are going to have a higher losing percentage because
the indicator is anticipating price behavior. In contrast, with a
lagging indicator we wait for behavior that indicates that a
reversal has occurred, and that new trend is already under way
before we commit to a trade. Most leading indicators measure
momentum, or the degree of the slope of a current price movement—
i.e., the speed of the trend—and are called momentum
oscillators. Momentum in markets ebbs and flows, and an indicator
that lets us know whether the speed of the market is accelerating
or slowing is a handy tool to have because larger price
changes usually are accompanied by higher price momentum.
A market can be making lower lows and lower highs and be in
an obvious downtrend, but if the rate of its descent is slowing
and we have a position that is going with the trend, we may
want to pay closer attention to price. We would take additional
confirmation from individual candle behavior and support
lines. Similarly, if the rate of acceleration is increasing in our
favor, we would be more inclined to maintain our position.
Direction constitutes important information, but measuring
momentum, particularly as a market approaches support
or resistance, has predictive value. Leading indicators include
stochastics, the Relative Strength Index (RSI), and the Commodity
Channel Index (CCI). Most trend-following indicators,
or “overlays,” such as moving averages and moving average
crosses, are considered lagging indicators as they are giving us
the price’s previous and current direction. Indicators based on
previous price action cannot alert us to a change of direction
until after the market has experienced it. An advantage of this
is that we are inclined to stay with positions longer. It is thought
by many experienced traders that the most important skill a
trader can have and the one that is the hardest to achieve is the
ability to “let a profit run,” or stay in a position longer and maximize
profits. Two of the main reasons for this are emotions,
generally nervousness, and leading indicators. Trend traders
need to be comfortable with lagging indicators. Lagging indicators
other then moving averages include moving average
convergence/divergence (MACD) and Bollinger bands.
Source: Mastering the Currency Market: Forex Strategies for High and Low Volatility Markets
