TYSlearn: Leading and Lagging Indicators
Crypto Trading has become one of the most widely used practices over the last decade. With users looking to try out the best strategies and use the best tools to get themselves a profit, it has become highly competitive especially since Crypto is still growing to this day. To set yourself apart from the rest, a trader must have a reliable strategy, keen focus and of course luck. Even if luck cannot be controlled, your next move can be and one important thing every Crypto Trader must know about is trend indicators.
Two common trend indicators used by many nowadays are leading and lagging indicators. As the names specify, leading indicators are those that are used by traders to predict the future movement of the market. Being the earliest on a market trend can give one a lot of benefit but these are by no means 100% accurate and as they say, “With high risk comes high reward”. Lagging indicators however are completely opposite with all the information being provided as the trend happens or is in progress. These are just used to confirm the price value for guaranteed placement. Although a low risk move, it gives traders much confidence that they have made the right choice by following the trend.
Although the main difference between the two is quite obvious, one happens before the market trend takes place while the other happens afterwards. With leading, you get much quicker reactions to price changes which can be great for short term traders but those predictions could go wrong whereas with lagging indicators, since the trend has already taken place, accuracy is guaranteed but the trader could be late in entering the trend reducing the profit margin. Within these two main indicators are a lot of different tools with their own computational calculators.
- Relative Strength Index (RSI)
With the RSI being a momentum indicator, traders can use this to see if a market is being overbought or oversold to quickly enter, exit or hold to make a profit. When the Relative Strength Index gives a signal, the trader should immediately consider that a sign to enter or exit the relative market. The RSI usually works on a scale between 0-100. If ranges go above 70, that would mean that the market will be overbought and graphs would be shown in red. Vice Versa, if it is below 30, that would mean that it is expected for the market to be oversold making the graphs green. Both ultimately leading the traders to either sell or buy.
- On Balance Value (OBV)
There is a difference between the price and the volume and the OBV makes good use of the volume to have traders make predictions about the market price. However as mentioned before, since volume changes don’t necessarily mean price changes, it can be a little risky to rely on OBV to predict the price. However, it has known to work before, that is why traders keep it in their arsenal while making decisions.
- Stochastic Oscillator
Stochastic Oscillator is another very widely used leading indicator that compares recent closing prices to previous trading ranges to help users predict the next price. This is based on the idea that market momentum changes much faster than price or volume of the assets. Similar to RSI, a reading of 80 or above means that the market will be overbought and a reading of 20 or lower would mean market will be oversold.
- Williams Percentage Range (%R)
This leading indicator works on the same practice as the Stochastic Oscillator except it is reversed. So rather than a reading from 0-100, it works on a scale of (-100) – 0. A reading of -20 indicates that the price is about to fall and a reading of -80 shows the indication that the price is about to increase. Some traders however prefer the scores to be skewed higher towards -10 & -90 before making any decisions since leading indicators are highly unpredictable.
As stated before, there is no 100% guarantee that leading indicators will come out to be a 100% accurate. That is why most seasoned veterans of trading prefer to utilize multiple techniques and readings combining them with others to make sure they make the right choice. Usually combined with leading indicators are lagging indicator types which are as follows.
- Moving Averages (MA)
Based on historical data or occurrences that have already happened, Moving Averages are rightly so included in Lagging indicators. In short, the closing prices of daily rates are taken into account and then divided by the total number of days to give a line showcasing the average of that time period. If the price range is above the Moving average line, that means that an upward trend is forming. Vice versa, if the Moving Average line is above the Price range, that means that a downward trend is imminent. Although the Current price will always be ahead of the Moving average, it usually is able to generate buy and sell signals. Here is some more detail on Moving Averages.
- Moving Average Convergence Divergence (MACD)
Usually something that adds value to a Moving Average reading is the MACD (No, this has nothing to do with MacDonald’s). Also being a lagging indicator, it is said that MACD provides traders with different opportunities. There are a total of three components to this tool. Two moving average lines and one histogram. When the lines intersect, that means that a change has happened giving traders a signal to buy or sell. The histogram is used to see the major changes that are calculated through the two moving averages. It sounds complicated but is simple once you get some practice in.
- Bollinger Bands
Being a lagging indicator, it is calculated using a 20 day Simple Moving Average and two external lines that move along with the moving average based on positive and negative standard deviations. When the Volatility increases in the price, the two external lines will expand and when the Volatility decreases, they will contract. The indicator usually comes when the price reaches close to one of the two external lines signaling that a rebound towards the central line is close. Even though they do not tell when the change takes place, it is an indicator that a change could take place. Usually traders will use this tool with other lagging and leading tools for verification before making a decision.
But here is a fair tip. Everything comes with experience. It is not enough to just know how to use the tools without any practice. Some traders prefer to use leading indicators and others prefer lagging while many prefer to use a mixture of both. But as mentioned above, it all depends on how the traders prefer to go about getting the best out of their trade. Don’t take this as financial advice, do your own research on top of this article and make sure to practice loads on exchanges to grow your portfolio. Interested in starting now, head on over to Tyslin Exchange where all the tools are integrated and can give you information based on your preference for a wide variety of cryptocurrencies and plenty of beneficial practice. Until next time, Good Luck and we hope that you excel!