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Lagging Indicators

Lagging Indicators

Richard Krivo, Trading Instructor

Instructor's Response:

All indicators are going to "lag the market" to a greater or lesser degree since they are all based on an average of price action that has already taken place. The longer the chart time frame we examine or the greater the number of periods analyzed by the indicator, the more of a lag that we will see.

That being said, remember that it is fine to miss the initial move that a pair makes in favor of entering a trade that has a greater level of confirmation behind it.  If we are looking to enter a trade at the very first sign that a move may be taking place, we are going to find ourselves entering trades based on very short term signals and, consequently, we will be basing our trades on what ultimately turns out to be a "false" entry signal.

Take a look at the GBPCHF chart below for an example... 

chart 1 25 10



If we enter this trade at the point when the MACD line crosses the Signal line, we forgo the profit between point A and point B on the chart due to the lagging nature of MACD.  However, when we enter this move after it is confirmed by the MACD we set ourself up for the profit represented between point B and point C on the chart.  As can be seen in this example, one can be a successful trader even though they are not capturing the initial pips in a move.

All in all, I would rather enter a trade late and be right then enter early and be wrong.

 

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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