An indicator is anything that can be used to predict future financial or economic trends. For example, the social and economic statistics published by accredited sources such as U.S. government departments are indicators. Popular indicators include unemployment rates, housing starts, inflationary indexes and consumer confidence. Official indicators must meet certain set criteria; there are three categories of indicators, classified according to the types of predictions they make.An indicator is a mathematical calculation that can be applied to a security's price/or volume fields.The result value that is used to anticipate future changes in prices.
Lagging indicator: "Lagging" indicators are also known as trend following indicators. These indicators are superb when prices move in relatively long trends. They dont warn you of upcoming changes in prices; they simply tell you what prices are doing(i.e., rising or falling) so that you can invest accordingly, trend following indicators have you buy & sell late and, in exchange for missing the early oppurtunities, they greatly reduce your risk by keeping you on the right side of the market, trend following indicators do not work well in side ways market.
moving averages and the MACD are edxamples of trend following, are "lagging" indicators.
A lagging indicator is one that follows an event. Back to our traffic light example: the amber light is a lagging indicator for the green light because amber trails green. The importance of a lagging indicator is its ability to confirm that a pattern is occurring or about to occur. Unemployment is one of the most popular lagging indicators. If the unemployment rate is rising, it indicates that the economy has been doing poorly.
Leading indicators: "Leading" indicators help you profit by prediciting what prices will do next. Leading indicators provede greater rewards at he expence of increased risk, they perform best in side ways, "trading" markets. Leading indicators typically work by measuring how "overbought" or "oversold" the security is. This is done with the assumption that a security that is "oversold" will bounce back.These types of indicators signal future events. Think of how the amber traffic light indicates the coming of the red light. In the world of finance, leading indicators work the same way but are less accurate than the street light.
What type of indicators you use, leading or lagging, is a matter of personal preference. It has been my experience that most investors are better at following trends than predicting them.
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