When participating in the forex market, speculators have a huge array of tools and tricks to help them try and identify new trading opportunities before they arise.
These range from simply keeping up with the latest economic news and data reports to opting for more technical means, including elaborate mathematical principles such as Fibonacci retracement.
One popular form of technical analysis is centred around the use of what’s known as ‘indicators’, a term covering everything from oscillators to moving averages and beyond. The good news is that despite the technical-sounding name, these useful tools are generally straightforward to grasp — so read on if you’re looking to take your trading to the next level!
What is an Oscillator in Forex Analysis?
Oscillators are a common indicator tool in technical analysis that present the highest and lowest recorded values of an asset (i.e. a peak and a trough) within a given timeframe, which are then used predict potential patterns of price movement within these boundaries.
Termed an ‘oscillator’ because they chart the movement of the instrument’s price back and forth within an established range, these indicators are a popular choice for traders wishing to discern whether an asset is either oversold or overbought in the near term.
Put simply, when the value on the oscillator chart is approaching the upper boundary for that instrument’s recent history, analysts could take this as an indication that the instrument is currently overbought (and so will likely experience a price correction downwards in the near future). By contrast, if the price looks set to touch the lower boundary of its normal fluctuation range, then this could serve as a signal that the asset is in fact oversold and will potentially to see a corrective reversal upwards before too long.
These types of indicators can be subdivided into two distinct categories depending on the point at which the signal is provided: leading and lagging.
Further reading: https://www.forexindicators.net/forex-trading-indicators/oscillators-explained/
What are Leading Indicators?
Leading indicators are technical tools that provide signals that a change in the market is set to occur before it happens, giving traders time to act accordingly and (hopefully) capitalise on them. Notable examples include the above-mentioned Fibonacci analysis, as well as Momentum, Relative Strength Index (RSI), Stochastic and Williams %R indicators.
These mechanisms attempt to gauge how overbought or oversold an asset is at any given time, working under the assumption that the price will eventually snap back towards the middle of its established range if and when it reaches either extremity.
Because they rely on tracking movements within boundaries, they are the form of predictive tool most commonly associated with the oscillator format, as illustrated in the rough diagram below:
As you can see, the indicator sits in front of the current trend, with the box sections highlighting the ‘lead’ before the change in question — which is handy as you can decide whether to act nice and early, and won’t miss the reversal when it comes.
However — mostly because they are only based on rough guides from previous movements — the downside for leading oscillators is they often give suggestions that don’t pan out as predicted (known as ‘fakeouts’) . This is why as a standalone tool they’re quite ineffective and could actually lead you to make unwise trading decisions if you’re not sufficiently adept at telling the good signals from the bad.
As you become more familiar with the intricacies of the particular instrument you’re investing in, though, sorting the proverbial ‘wheat from the chaff’ will should become easier — and when used in tandem with other concepts such as support/resistance levels and candlestick patterns, whilst keeping an eye on the market fundamentals, they can nevertheless prove to be another useful part of your technical arsenal.
Further reading: https://www.dailyfx.com/education/technical-analysis-tools/leading-indicators.html
What are Lagging Indicators?
Also known as ‘trend following’ or even ‘trend confirming’ indicators, lagging indicators are designed to alert traders to a new phase of movement once it is already in motion, giving a signal once the trend is already visible on the chart.
Owing to the fact that these indicators aren’t speculative in nature, lagging indicators tend to be much more accurate and aren’t prone to jumping the gun — on the other hand, an obvious drawback is they only inform you of a reversal as it’s happening, meaning you’re resigned to being a late entrant into the trend should you choose to participate.
In other words, these indicators are more descriptive rather than predictive; they merely describe what is currently occurring (in terms of prices rising or falling) instead of looking ahead to future events.
If you’re content with consistently buying and selling late and catching the end of each major shift, then you’ll find a lot of value in lagging indicators and they can be very helpful in keeping you on the right side of any market shift, thereby significantly mitigating risk.
However, since most gains are typically made in the early stages of a reversal, relying solely on these tools means you’re forfeiting any profit that could be made from taking more calculated risks and identifying new movements earlier.
Further reading: https://www.brokerxplorer.com/article/leading-vs-lagging-indicators-which-is-best-for-you-1710
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