Forex trader needs indicators to determine important entry and exit points. Forex Indicators predict financial and economic trends. Forex indicators can be categorized into two types, each of which makes a different prediction.
Two Types of Forex Indicators – Leading and Lagging
The first type of forex indicator is called leading. It is an indicator that shows you when to buy before a new trend or reversal. You can compare leading indicators to a virus scan that catches a virus before it attacks your computer! In forex market, leading indicators work in the same pattern, but unfortunately they aren’t as accurate. How is leading indicator formed? It follows the market changes and identifies repetitive patterns. With that information, leading indicator forecasts the future. When you depend on leading indicators, you might experience a lot of fake signals which can misinform you and cause a wrong decision.
The second type of forex indicator is called lagging. It is an economic indicator that tells you when a new trend has already started. Think of lagging indicator as a virus scan that tells you that your computer has been infected! Lagging indicators are definitely more trustworthy since they point out exactly when the price has already been changed and a new trend is visible. The disadvantage is obvious – you miss the beginning of the trend!! And since the biggest profit lays in the beginning of the trend, you obviously will miss a big chunk of profit.
Oscillators indicators are leading indicators. Just a reminder, oscillators are the ones that are drawn within boundaries of two lines. The oscillator signals buy or sell based on the set levels of the range. The leading indicators that we have covered here at ForexExplore are Relative Strength Index (RSI) and Stochastics.
Momentum indicators are lagging indicators. Momentum is the rapid change of price when related to security analysis. Momentum indicators track momentum in the price (duh, that’s obvious!). Lagging indicators follow the price changes and, despite the quality of their predictions are less profitable, are very useful during trending periods,. The lagging indicators covered in ForexExplore.com are Moving Averages and Bollinger Bands.