Wednesday, March 9, 2011

Lagging or Leading Indicators

Nirav asks: "As you have said that Moving Avg. is a laggin indicator as it uses past price data. So does it mean that all the indicators are ladding indicator as they use past prices? And if they are lagging indicator than which are leading indicators or what can be used as a leading indicator or to forecast the trend? Are price patterns or candelstick formation are the leading indicators? "

My Notes:
Technical indicators are derivatives of price action. This is good and bad, both. It is good because the indicator will more or less reflect what price does. It will not go its own way. It is bad because, they are likely to lag price action. This means that while indicators tend to be correct, they also tend to be late.

Indicators can be divided in two parts. Trend indicators like moving averages, MACD, identify the direction of the market, the trend. These are almost always lagging, meaning that the trend has already started when the indicator gives a signal. When there is a long trend, this does not matter much, since the indicator will capture a good part of it, inspite of being late. But, when the trend is short, the indicator gets in late and gets out late causing whipsaws.

Momentum indicators like, ROC, stochastics, RSI are leading indicators. Rather than measure price directly, momentum indicators measure the ratio between buying and selling strength. They alert traders on overbought/oversold, divergences and crossing of middle lines, all of which are leading signals. The alert is given before the actual event. As most traders know, many of these signals do not work out, while those that do let you sell at the very top and buy at the very bottom.

Candlesticks are also leading indicators.

It is the task of the trader to understand the nuances of trend, momentum and candlesticks patterns in different trading environments. This is usually many years of study. Patience has its own rewards.


Krishna said...

Dear Friends

It came to my mind that I may not be having sufficient understanding of the stock market to earn sufficient to earn my daily living through trading.

If I opt for long term investment then it becomes like buying & forgetting kind of style but again it will not help my cause to earn sufficient money to feed my family & run my home.

To run my home I shall require money on daily or weekly or maximum on monthly basis.

Irony is that instead of making money just reverse is happening i.e. more money is being lost than earned.

Will subscribing to paid services offered by stock market experts help me to take stock market trading as a profession which fetches enough money to run my home.

Please share your experiences & guide.


Miten Shah said...

Hello sir,

I see a round top formation in copper.I request your views on the same whether i am on the right track. Also can this be used as an opportunity to enter into transformation manufacturing companies such as TRIL and Voltamp?

Also sir i request you to join twitter and facebook. Your followers like myself would be grateful to see even your 2 line comments.

men said...

Dear Mr. Sudarshan,
You had given a bearish view on tisco, but today it had gone up on heavy volumes, how does one confirm if this will sustain or this is a just one off rise? I am faced with this dilema very often when I am bullish/bearish and the stock goes in the opposite direction, how can we confirm if such moves are here to stay or they are just a flash in the pan?

ilan kaalai said...

one basic question sir,
what are primary, intermediate, immediate trends? how long one trend is taking to change counter side? what are the importance of these trends , how to use them for investment and for trading?

thank you sir

sailendra said...

I regularly follow you on ET channel & at your blogs. Good thing about your comments are - clear thoughts ( without if & but).

I would request you to through some light on points which should be considered to take a position ( either buy / sell ) around 2.30 pm to be carried overnight.

Pls. share your knowledge on it whenever you have time.

Sailendra Sharmaa