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What are leading and lagging indicators?

Similar to the definition used within the scope of macroeconomic indicators, a leading or lagging technical indicator refers to a buy or sell signal before or after the trend occurs. In the case of a leading indicator, it refers to a buy (or sell) signal before an actual trend develops on a Forex trading system chart. On the other hand, a lagging indicator gives an investor a buy or sell signal after a trend has developed.


Wouldn’t a leading indicator always be better?

Logic would seem to dictate that a leading indicator would be much more helpful than a lagging indicator: after all, who would want to miss the boat on a potential winning investment? However, not all leading indicators become reality. The leading indicator only assumes that a trend will form based on immediate currency behavior. That behavior could take an unexpected turn for the worse at any time though. Keep in mind that although leading indicators can be beneficial as part of an overall Forex trading system strategy, they cannot foretell the future 100% of the time (possible fake signals).


What about lagging indicators?

If leading indicators aren’t successful predicators of market behavior 100% of the time, what about lagging indicators? These too are not 100% accurate, as no technical indicators usually are. That’s because an investor might miss a good trade opportunity on a Forex trading system platform if he waits too long for a trend to develop. He won’t be prone to placing trades based on false signals, but he might lose out on some ground floor trading opportunities (less of a risk-taker).


So which do you choose?

It really depends upon an investor’s overall strategy. If he’s a bit of a risk taker, he might prefer leading or oscillator indicators (i.e. Stochastics, Parabolic SAR, Relative Strength Index); otherwise, he could opt for lagging or momentum indicators on a Forex trading system platform such as MACD and moving averages.

from :http://www.fx-auto.com/articles.html