What are the leading indicators and lagging indicators in encryption transactions? How to use lagging and leading indicators? According to the type of information provided by trading indicators and their reaction speed to price behavior, trading indicators can be divided into leading indicators, lagging indicators, or even both. Understanding how they work will help you understand the best way and when to use certain indicators in the market during technical analysis. This knowledge can also help you better understand market dynamics based on the indicators you use.

What are leading indicators and lagging indicators?

Leading indicators and lagging indicators are technical indicators to enable cryptocurrency traders to understand what will happen next or has happened in the market. These two indicators provide traders with information from the market to guide their trading decisions. The main difference between the two indicators is the time when they provide signals.

Leading indicators

Leading indicators are indicators that indicate where prices may go next. These indicators use price data to predict future price trends. Leading indicators can help you enter the trend early and provide favorable entry and exit points for transactions. They are usually more insightful in technical analysis because they can help you enter high probability transactions.

Lagging indicator

Lagging indicators are also called trend tracking indicators because they follow market trends. These indicators only focus on historical data and do not imply what will happen to the market next. They use the average of previous price data to inform traders of market dynamics.

Examples of leading and lagging indicators

To better understand how these specifications work, consider the following examples.

Leading indicator: Fibonacci retreat

The Fibonacci pullback level is the horizontal line used to determine possible levels of support and resistance. This indicator can help you determine the trading entry point, stop loss point and profit point. Fibonacci pullback is most effective in trend markets.

If prices begin to fall or retreat in an upward trend, traders will use the Fibonacci retracement tool to draw a retracement line to connect the last relevant swing high and swing low. This will help them see the invisible support in the market, so that it is easy to determine the position where the price may reverse and the upward trend continues.

Leading indicator: candlestick

The candlestick shows the opening price, closing price, highest price and lowest price of the market in a specific period. Each candlestick has its own specific information. Trained traders understand information and use it to find a way out in the market. In other words, each candlestick provides an easy to understand price trend chart.

You can use the length of the candlestick wick, the candlestick body, and whether it is bearish or bullish to determine what is happening in the market and what may happen. Common candlestick patterns include cross lines, engulfed candlesticks, gyroscopes, hammers, and needle rods.

Lagging indicator: moving average

The moving average determines the trend and direction of the encryption market. The information of the moving average is generated by using the previous price points, that is, the historical data of the market.

Moving averages will generate buy and sell signals when they cross, although traders cannot rely on them to obtain the best trading entry point. This is because when the moving average shows a buy or sell signal, the price trend must start a period of time before that, making any reaction to the moving average signal late.

Leading and lagging indicators: Bollinger Belt

The Bollinger belt is composed of moving averages, which act as the middle and upper and lower belts to determine whether the price is relatively high or low. Traders believe that the upper limit is an overbought position and the lower limit is an oversold position. Therefore, they buy when the market is close to or below the lower limit and sell when the market is close to or above the upper limit.

Bollinger bands, like RSI (see below), are essentially lagging indicators because they move after price changes. They only react to price changes. However, external bands can serve as leading indicators because they indicate when prices may reverse.

Leading and lagging indicators: relative intensity index

The Relative Strength Index (RSI) is another inherent lagging indicator that tells cryptocurrency traders when the market is overbought or oversold. RSI oscillates between 0 and 100, usually calculated in a 14 day period. The proportion above 70 is considered overbought, and the proportion below 30 is considered oversold. RSI also provides information about who controls the market. Traders usually regard the scale with more than 50 points as the buyer's market and the scale with less than 50 points as the seller's market.

As with other lagging indicators, the main problem of relying on RSI is that the signal usually comes late. The market must have been bullish for some time before it was reflected on the RSI chart.

RSI can also be used as a leading indicator to show traders what may happen in the market. Let's consider the RSI deviation. RSI deviation indicates that the current trend has lost momentum and may reverse. This can be seen as an early warning signal and indicates to traders that a possible reversal is imminent. In the case of RSI deviation, RSI shows the change of market momentum before it is reflected in the price, so it serves as a leading indicator.

How to use lagging and leading indicators?

From the above classification, you can see that some cryptocurrency technical analysis indicators are leading indicators, some are lagging indicators, and others are both leading indicators and lagging indicators, depending on their interpretation methods.

Some traders use a combination of leading indicators and lagging indicators when trading. Some traders prefer to use only leading indicators, such as Fibonacci retracement line, support and resistance, candlestick language and any leading indicators they think are useful. Classifications are primarily functional, as how you use them depends on your cryptocurrency trading strategy.

Now that you know how leading and lagging indicators work, you can better explain the chart information related to your strategy. For example, if you try to buy because the moving average cross shows a buy signal, you are likely to delay buying. As the moving average is a lagging indicator, it is not conducive to determining the entry point and exit point of the transaction.

On the other hand, lagging indicators are useful in examining how historical data and prices change over time. However, nothing can prevent you from using this information to predict future market events.

No indicator should be used as an independent indicator. You must combine it with other tools to make better trading decisions.

In general, after knowing what the leading indicators and lagging indicators are, we can definitely say that these two indicators are necessary tools for successful trading. The choice of how to use them only depends on how your strategy works best. Of course, we can't deny that understanding their working principles and how to interpret the data they provide will be of great benefit to your market analysis.