Leading indicators predict market trends. The leading indicator changes before the market changes.This gives early warnings of trend change to traders and investors.Leading indicators are therefore predictive in nature. For example, the market trend is down. The leading indicator turns up suggesting that a trend change may be coming. Soon enough the market also turns up. Traders get a distinct advantage when the leading indicator gives a correct prediction. In the example above, short positions can be closed while the market is at its lows, and, the trader can be ready to buy at the earliest buy signal.
This is perfect, sounds too good!
When something is too good to be true, it probably isn’t true.
Now, if there exist an indicator that can accurately predict market turns, surely everyone using those indicators would make money. In fact, possession of such indicators can probably give a lot of money, almost all the wealth in the world. No one has such wealth from trading, so we can accept that leading indicators having perfection, do not exist.
But, imperfect leading indicators, are available in public domain. These methods are not perfect, far from it. But, they do predict. A trader can use such indicators, combine them with proper money management, market view and develop a trading plan.
Some leading indicators are:
1. Elliot Waves – where the end of waves is forecast.
2. Fibonacci – where levels are identified which act as targets as well as support / resistance on pullbacks.
3. Momentum Oscillators – where overbought / oversold areas are identified which warn of trend change. Also, divergences are located which give similar trend change warnings.
4. Shadows – large shadows in candlesticks that emerge after sustained trends suggest that the trend may stall or end.
As I noted earlier, all of these indicators are imperfect, they give many false signals. But,within a trading plan, such indicators can be useful and become predictive.