Commander in Pips: And the last part in this chapter will be dedicated to lagging indicators. Here my view coincides with common one. Although common approach classifies as “lagging” trend indicators items such as Moving Averages and MACD, so I agree with that, but I also think that some of the oscillators that we’ve discussed in previous part are lagging as well. Despite the fact that their lag behind the price action could be smaller than of trend indicators. Sometimes trend indicators are called “Momentum Indicators”.
Pipruit: And what common approach tells about advantages and disadvantages of lagging indicators?
Commander in Pips: Well, it tells us that since a new trend has been established, momentum or trend indicators will catch it. But it will happen with some lag, and it could turn that you will miss a good entry point. From the other side - it is less probability to be wrong, since momentum indicators are less sensitive to fake outs, and hence, rarely give bogus signals.
Commander in Pips: Let’s take a look at how it works:
Chart #1 | GBP/USD Weekly. MA and MACDAs you can see, in August 2008 a sell signal has come simultaneously from MACD and MA crossover on the chart. It has finished with an excellent down thrust. In the beginning of 2009 MACD has given a buy signal a bit earlier than moving averages, but still both of them have turned in the same direction. A very interesting situation has happened at the end of 2009 – although MA has shown bullish crossover – MACD has held a down trend and negated this buy signal. And finally, in June 2010 MACD and MA has given signal to enter the market at long side.
So, you can see that sometimes MACD gives signals a bit earlier, while MA still hold the previous trend. For example, as it has happened in January 2009. As you can see, after MACD has generated a signal the market has shown solid retracement down. Potentially such price action could turn to losses or you will be nervous at such price action. AS with other indicators we must use MACD or MA, but only as a tool in an overall trading plan. For instance, if your trading plan suggests that you must enter on retracement low, after confirmed a buy signal from MACD – then you have entered almost at the extreme low and caught anoutstanding move up then. I just want to say that we should not trade blindly based on any single indicator, despite how it could be attractive to you and the grade of your fascination with them.
Personally, I like MACD as a trend indicator, but I do not use it in the simple way – “up cross – buy, low cross – sell”. I prefer to use it during thrusting moves, look for cross angle, look where this cross has happened, what kind of price action was before the MACD signal, does price action support the trend or not and so on…
In other words – a trading plan is that you should follow. Indicators are just tools that help you to understand the overall picture and decide – do you wish to take the trade or is it better to wait for another chance…