Let’s continue our discussion on leading and lagging indicators.
You would “catch” the entire trend every single time IF the leading indicator was correct every single time.
But it won’t be.
When you use leading indicators, you will experience a lot of fake outs.
Leading indicators are notorious for giving bogus signals which could “mislead” you.
Get it? Leading indicators that “mislead” you?
The other option is to use lagging indicators, which aren’t as prone to bogus signals.
Lagging indicators only give signals after the price change is clearly forming a trend.
The downside is that you’d be a little late in entering a position.
Often the biggest gains of a trend occur in the first few bars, so by using a lagging indicator, you could potentially miss out on much of the profit.
And that sucks.
It’s kinda like wearing bell bottoms in the 1980s and thinking you’re so cool and hip with fashion…
Or like discovering Facebook for the first time when all your friends are already on TikTok…
Or like getting excited about buying a new flip phone that now takes photos when the iPhone 11 Pro came out…
Lagging indicators have you buy and sell late.
But in exchange for missing any early opportunities, they greatly reduce your risk by keeping you on the right side of the market.
For this lesson, let’s broadly categorize all of our technical indicators into one of two categories:
While the two can be supportive of each other, they’re more likely to conflict with each other.
Lagging indicators don’t work well in sideways markets.
Do you know what does though? Leading indicators!
Yup, leading indicators perform best in sideways, “ranging” markets.
The general approach is that you should use lagging indicators during trending markets and leading indicators during sideways markets.
We’re not saying that one or the other should be used exclusively, but you must understand the potential pitfalls of each.
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