The leading indicators are momentum based oscillators. As their name implies, leading indicators are designed to lead price movements. Most represent a form of price momentum over a fixed look-back period, which is the number of periods used to calculate the indicator. For example, a 20-day Stochastic Oscillator would use the past 20 days of price action (about a month) in its calculation. All prior price action would be ignored. Some of the more popular leading indicators include Commodity Channel Index (CCI), Momentum, Relative Strength Index (RSI), Stochastic Oscillator and Williams %R. There are clearly many benefits to using leading indicators. Early signalling for entry and exit is the main benefit. Leading indicators generate more signals and allow more opportunities to trade. Early signals can also act to forewarn against a potential strength or weakness. Because they generate more signals, leading indicators are best used in choppy markets. These indicators can be used in trending markets, but usually with the major trend, not against it. In a market trending up, the best use is to help identify oversold conditions for buying opportunities. In a market that is trending down, leading indicators can help identify overbought situations for selling opportunities. With early signals comes the prospect of higher returns and with higher returns comes the reality of greater risk. More signals and earlier signals mean that the chances of false signals and whipsaws increase. False signals will increase the potential for losses. Whipsaws can generate commissions that can eat away profits and test trading stamina.
Yes ,even price action lags some and everything else does also. Price lags less than most; still lags and still use it. ---------------------------------------- Star wars trend ''The stars in thier courses [spheres] fought. ''
they all still lag.if you look at them all you will see that they are a mathematical calculation of price.since the price has to happen first and no one has the future price the indicator has to lag. Oscillator indicators are mostly based on the difference between two moving averages so they lag even more than the moving average.if you look at a momentum indicator you are looking at past momentum and making a judgement that it will continue.
I have to disagree. You can use stochastics to predict a short term price reversal (on a choppy stock on a non-trending day) with a high degree of certainty. You have to learn to read the degree and speed of crossover between the %K and %D lines at the upper and lower envelopes.
sure but the question was do indicators lag.since stochastics is the difference between a fast moving average and a slow moving average something has to key the signal.that is past price action.therefore stochastics lags the price. now by presenting the data in the way stochastics does it may be easier for a trader to precieve the change in price and try to predict future direction than just looking at the price on a chart but nothing can lead the actual price.
IMO then the most efficient way to use them is to look for divergences, like a double top but with the stoch weaker in the second top, etc. Thanks for the Insights
All indicators lag by definition, because by their very nature they are constructed from data that has already happened. (Just as all price and volume data that reaches you lags as well, because its creation and dissemination is less than instantaneous.) However, there is lag and there is significant lag ----- There is a tremendous difference between indicators (and their periodicities) which lag to crucial degrees and those which are so swift and self-adjusting that for all practical purposes their tiny degree of lag is utterly immaterial. Distinguishing between these two very different conditions (and various intermediate situations) is the key to grasping the significance and pertinence of indicator lag, and to using indicators in different time frames and for different predictive purposes. (Merely because an indicator has a small degree of lag emphatically does not mean that it can't be of great predictive value.) A one size fits all approach does not apply here.
I think you'd better read the first Chapter of John Murphy's "Technical Analysis of the Financial Markets" again. After some reflection, I hope you'll find that you're confusing the terms 'prediction' and 'forecasting' with 'leading indicators'. I've spoken with John Murphy a few times, and he'll be the first to admit the limitations of technical analysis with respect to being "leading indicators".
The question "what came first, the chicken or the egg?", is more complicated than this thread. Indicators are derivitive of price thus they lag. Predictive "value" non withstanding. To think otherwise would be like saying that a newspaper leads news.
Nope... goldenarm is accurate. There are leading indicators and lagging ones. Each of his/her posts is entirely accurate. Probably the best known one is the Stochastics oscillator. While it is derived from "historical" data, it is considered by the experts in mathematics to be a leading indicator of trend. Trend of course differentiates itself from price. I don't know of any leading price predictor, except for example the measured move. As a trend predictor, however, the stochastic oscillator and momentum indicators are leading indicators.