Forex traders use a multitude of data to determine their strategies. One practice that is quite common is the use of price-action “indicators.” Traders use these chart signals to determine where prices are headed, helping them to better time entries and exits into trades.
For the majority, there are two common types called lagging or leading indicators. Leading indicators signal when a trend or reversal is happening. Therefore, they enable traders to enter a position before the trend and capture all of the profits of that trend. Lagging indicators, on the other hand, signal that a trend has already begun. Using lagging indicators, a trader can enter a position with the trend.
So what’s the difference between the two? And is it better to use one or the other?
Leading Indicators in Forex Trading
The majority of major currencies trade within a range, as prices move from low to high or high to low. In other words, the currency pair is moving sideways. Leading indicators are most effective when a currency pair is moving within a predictable range.
Ultimately, these indicators signal when the price is nearing the top or bottom of the trend. When a currency pair nears the bottom of the range, it is considered “oversold,” and it is likely to reverse the trend. The opposite is true when it reaches the top of the range. The currency is “overbought.” Whatever type of indicator that you use, will signal a buy or sell call when the trend is at its peak.
There are many different types of…