Trader Tip: Lagging Indicators We have all heard the notion of leading and lagging indicators in both fundamental and technical analysis in trading. Obviously, we want to focus on leading indicators when trading, as we are all trying to predict the next move in a specific instrument we are trading. So the question we will try to answer in this Blog article is, which indicators are better than others for Triggers (what causes you to enter a trade) in your Trade Plan?
By way of review, the three parts of the Trade Plan design theory are: the Trigger, Order Management and the Filter. So many traders only focus on just the trigger, that they completely forget about the other aspects of the Trade Plan. If we were to break down the percentage of importance of these three parts, we would break it down as follows; the trigger is 40 percent, order management is 40 percent and the filter is 20 percent. Today’s discussion will focus on the Trigger.
Further in review, trade indicators line up into three types as well; “support-resistance-trend”
lines, “price derived” indicators (i.e. MACD, moving averages, Stochastics, etc…) and time and “price patterns” (i.e. candle stick hammers, flags, head and shoulders, etc). So again, the question is, which indicators are better than others for Triggers in your Trade Plan?
In general “support-resistance-trend” and “price patterns” indicators are more leading indicators than “price derived” indicators. Why? “Price derived” indicators is computed on past data, and require that price move in the indicated trend direction before it can give a signal (i.e lagging). The other indicators are present and fulfill their purpose real time at the point of the Trigger (i.e leading). One exception here is that sometimes a “price derived” indicator may support one of the other types if indicators in terms of chart visualization of the specific indicator (i.e. a ZigZag indicator might help define the swing high/lows of a “price pattern” indicator – see below link for more on this.). Please see the aside thumbnail chart (click to enlarge) an illustration of this phenomenon.
We have all heard that 60 to 80% of traders are losers. When we review Trade Plans of our traders here at Blue Point Trading, I must say that unfortunately, this same percentage of traders do not apply the principles discussed in this Blog article (i.e. most Triggers are “price derived”). Correlation? In any case, I hope this will help when constructing your Trigger in your Trade Plan(s). Click here, or watch below a video presentation of this Trader Tip.
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