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Chapter 13, Part I. Leading and Lagging Indicators. Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 20, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Pipruit: I guess not. We’ve studied already, that indicators have a tendency to fail from time to time, and we should not rely on any single tool.
    Commander in Pips: That’s it. In fact, relying just on a single indicator without any detailed trading plan is more like a gambling than trading. Because here you do not need to think – the indicator gives a signal and you take action. That’s all. But at this point in our school you should already know that making money on Forex is a tough business, not gambling.

    Pipruit: Yes, I remember that.
    Commander in Pips: That’s good. Let’s continue… Also there is an opinion that leading indicators are very sensitive to different splashes and fake outs, because they react fast even at the smallest changes in recent price action. This is like working with a short period MA. In other words, sometimes they could mislead you.

    But we also have lagging indicators, and common approach tells us supposedly that they are not so prone to bogus signals. But lagging indicators form signals, when trend shifting has happened already and price action is clearly forming a new trend. The problem with using just lagging indicators (for confidence in trend shifting) is in fact, that very often a solid move happens during the initial period of a new trend and by applying only lagging indicators you can miss a lot of profit.

    So, as you can see the same problem as with short period MA – EMA seems fast but too sensitive, while long period MA is smooth but too slow.

    The major approach to classification creates two groups:

    1. Oscillators, i.e. leading indicators;

    2. Trend following (momentum) indicators, i.e. lagging indicators.

    Sometimes they could support each other; sometimes they could oppose to each other, none of them should be used exclusively, but you have to understand their snags.

    So, we will start from general approach to Leading and Lagging categorization, and then we discuss our approach.

    Pipruit: What “our” approach?​

    Commander in Pips: We think that leading indicators are those that do not need any price action to appoint on support or resistance ahead of time, while lagging indicators do.

    Pipruit: And do such indicators exist at all?​

    Commander in Pips: Sure, but not just indicators, but “tools” also…

    Pipruit: Sounds intriguing…​

    P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer soon.

    Note: FPA ranks are earned in the battles against scam, not in the classroom.
    #1 Sive Morten, Dec 20, 2013
    Lasted edited by : Mar 25, 2016
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