There are 2 main types of Technical Indicators : Leading vs Lagging
To start off, it’s important I let everyone know that at the core of things, there are only 2 categories of technical indicators around, those that lag behind price (lagging indicators) and those that are one step ahead of price (leading indicators).
Some common and popular lagging indicators include :
- Stochastics oscillator
- Moving Averages
- Bollinger Bands
And many more. Basically, all these indicators wait for price to move before they are able to make a move. The problem with this is that you tend to “arrive at the party late”. Most traders who use lagging indicators experience this frustration when they seem to “miss out” on a big move or get in when the market is just about to reverse.
If we take a deeper look into the big picture of how markets work – these lagging indicators are used by a large majority of novice and retail traders, and are actually key areas where the smarter traders who utilize leading indicators look to unload most of their position before the rest of the “herd” catches up with them.
So while these indicators certainly may look like they provide some value (funny moving average crosses, different settings on bollinger bands, etc.), their use is ultimately limited because by their very nature, they are lagging.
It’s really a simple question you have to ask yourself : If you’re going to war, would you like to be the first person at the battle scene (hence, leading) waiting for your unsuspecting opponent to arrive? Or would you rather be the unsuspecting person (hence, lagging) person to arrive not knowing where your opponent may be?
What about these Leading Indicators you speak about?
Well, there are only a couple of leading technical indicators in the world today and each one has a different use depending on the market you trade. All of them are absolutely golden and when used in conjunction, can make you one of the most lethal traders around. The problem, of course, is that acquiring the skills to trade this is far from easy.
Leading Technical Indicators :
- Elliott Wave
- Hurst Cycles
Now, I will explain in detail each of these leading indicators and their advantages / disadvantages.
Volume is fantastic for forecasting what the market might be doing next because you’re able to see exactly how many people are selling/buying at various prices. So if you notice that at a certain level, a lot of people are selling but price is remaining the same (when it’s supposed to be dropping), you can be sure that there’s a big player in the market buying up all that – this is at the core of how volume analysis works.
Essentially, you observe the way the particular trading instrument reacts to volume changes (churning, high volume bars, low volume bars, etc.) and you’re able to determine where the “smart money” is heading.
There are a couple of disadvantages with using volume as a leading technical indicator. One of the main reasons is when you’re trading forex, there is absolutely no proper way of getting a good estimation of volume. The volume indicators you see on your broker’s MetaTrader 4 or other platforms is a measure of their volume. Not the entire world’s. The problem, of course, is that no matter how big your broker may be, it is still inherently a very inaccurate estimation of true volume.
The game of trading profitably is already tough enough, so why make it tougher with inaccurate information?
What if you’re trading stocks? Well, that is much better, actually, as you are able to get an accurate reading of volume as everything is transacted through a centralized exchange.
There is also a debate on how profitable using volume to trade can be, though. Most people prefer to use it as a confirmation signal rather than a trading signal as by itself, it has tasted mixed success.
Advice for using Volume as a Leading Technical Indicator :
From my professional opinion, if you are trading forex, don’t bother using any form of volume analysis as no matter how many forums or companies are boasting about them, inherently, unless you find a proper way to link the volume of every single broker worldwide, the information you get is inaccurate and incomplete. If you are trading stocks/equities, then use it as a confirmation signal rather than a trading signal. Volume by itself is very subjective and popular indicators like VSA of Better Volume Indicator have produced a lot of false signals and are very subjective on how you interpret them. I would do all my analysis then at the end, use volume analysis to see just how well it lines up with my forecast.
Fibonacci (includes Elliott Wave and Hurst Cycles)
Personally, I am the greatest fan of fibonacci because two of the most powerful cyclic strategies (Elliott Wave and Hurst Cycles) revolve strongly around and have their roots in the laws of fibonacci.
If we do an in-depth study into the fibonacci sequence and mathematics, we will be able to see just how powerful it is and how a lot of the world conforms to it (deep stuff, I know). Many times, when you draw fibonacci retracements on charts, you can easily be astounded by how well price reacts to the key fibonacci levels.
Now, the concept of fibonacci and elliott wave (which basically is an arrangement of fibonacci retracements and projections within the limitations of certain patterns and rules) is extremely complicated and excels in identifying key levels of support and resistance. The key here, is to then identify key levels across multiple time frames and use the fibonacci confluence (basically the combination of multiple fibonacci levels) to trade off these levels.
If a person is able to plot multiple fibonacci retracements, projections and levels across the 1 minute, 5 minute, 15 minute, 30 minute, 1 hour, 4 hour, daily, weekly, monthly time frames, they would come up with a killer strategy without a doubt.
The problem, of course, is that plotting multiple fibonacci retracements, projections and levels across the 1 minute, 5 minute, 15 minute, 30 minute, 1 hour, 4 hour, daily, weekly, monthly time frames is about the most tedious process in the world and when you’re done with one time frame, the other time frames would have moved.
Understanding how to plot fibonacci and where to plot them from is not easy too, and if traders want to include the concept of elliott wave into them, they could quite possibly turn insane with the amount of analysis required.
Advice on using Fibonacci as a Leading Technical Indicator
The only possible way to harvest the true power of fibonacci confluence analysis is to use a program, and quite simply, the TFA Sniper we have developed over 15 months of mind numbing coding has does this for you.
It automatically calculates the key fibonacci levels across 7 time frames (1 minute, 5 minutes, 15 minutes, 1 hour, 4 hours, 1 day) for you and provides you with crystal clear colour coded entry levels with momentum analysis already factored in for you.
Personally, I would stay away from lagging technical indicators because by their very nature, they get you to arrive late at the party when everyone else has left and leave you scrapping for leftovers.
If I were to pick a leading technical indicator, my first choice would definitely be the fibonacci approach and although most of the time that is more than enough to pick good entries, if I were to look for longer term entries, I would include volume analysis as a confirmation signal or a signal that helps me filter out how big a position I should take with my trades.
Here at The Forex Army, our trading strategies revolve around advanced and highly technical fibonacci mathematics and sequences across multiple time frames, along with that, we combine the power of momentum analysis (so we don’t trade against the momentum of the market), strict trading management strategies (we automate them actually), proper trading psychology (crucially important) and teamwork (trading as a team) to help us all bag crazy amount of pips everyday.