Lagging vs leading indicator
Firstly I want to state that all indicators are based off prior information, but some are better at predicting future trends than others. The indicators that are better at predicting the future are called leading indicators. These indicators are based on the now price, but due to the lack of data, it is hard to make any substantial future predictions. A lagging indicators is an indicator that trails behind price action. They are mainly used to understand the strength of trends and to analyse historical data. They are called lagging because they are based on historical data, which means the indicator can only provide a signal of an appending change after the change has occurred in the market.
Lagging indicators are no noise overview of what is has happened in the past to allow you to make
Moving average is an example of a lagging indicator. There are versions of the MA that are classified as a leading indicators, but the majority of MA’s are lagging.
Leading indicators tend to be used to predict what will occur in a market. Many governments use leading indicators to guide their decisions on fiscal polices and financial matter. This is due to the warning signs a leading indicator can provide. On the other hand, leading indicators can provide skewed or false signals which can lead to losing trades. Leading indicators are not 100% correct and external factors can affect the results. Nothing can predict the future 100%, but we use leading indicators to support our predication. A majority are stochastic oscillators, this means they are momentum indicator that uses support and resistance levels. Finally Leading indicators tend to be plotted in a banded range, so they are never 100% accurate.
An example of a leading indicator is relative strength index (RSI), which is a stochastic oscillators.