The $6 trillion per day international currency market is dominated by major banks, hedge funds and institutional traders exploiting their access to powerful real-time data feeds, trading infrastructure and advanced indicators for microsecond advantages.
Retail traders face inherent disadvantages given available resources. Therefore, crafting reliable trading techniques using freely available lagging forex indicators takes on greater significance.
While lagging indicators generate historical insights rather than predictive signals, applying their trend and momentum confirmation powers can lead to capturing large profitable swings at opportune turning points even for smaller traders.
Defining Lagging Indicators
In technical parlance, lagging indicators are metrics that respond to price moves only after the underlying trend or momentum has taken hold. They analyze what has already definitively happened rather than what may unfold next.
This contrasts leading indicators designed to anticipate reversals or new movement directions ahead of the overall market. Examples there include forward-looking data like market sentiment surveys, building permits, central bank policy changes and earnings guidance.
Lagging signals derive from backward-looking averages, support levels, volatility measures and historic economic data. They generate power in observing existing tendencies with clarity and gauging their persistence.
Major Lagging Indicator Categories
Several essential lagging indicator categories confirm forex trends and momentum:
Moving Averages Likely the most utilized lagging forex indicators are moving averages and their derivatives. SMAs (simple moving averages) and EMAs (exponential moving averages) display average closing prices over set historic periods. Longer averages lag but smooth out volatility for trend clarity.
When short term averages cross above longer averages, uptrend starts are signaled. The reverse flags near term weakness and selling pressure dominance.
Oscillators
Momentum oscillators like the MACD and Relative Strength Index (RSI) derive overbought/oversold levels from recent value changes and ranges. The scale from 0 to 100 signals peaks and troughs in momentum. High RSI signals uptrend exhaustion while low marks assumption of a new uptrend.
Classic Support & Resistance Past peaks and troughs where countervailing waves have reversed create support and resistance levels. Prices retreating to these zones often reverse since sufficient buying/selling interest resided there previously. These observable levels generate reliable signals for banks and institutions.
Economic Reports While forward-looking components do exist, the likes of GDP, jobs and sentiment reports largely consolidate what has already transpired over the measured period. Impacts often confirm existing risk conditions.
Applying Lagging Indicators when Trading Forex
Skilled traders apply lagging indicators not as definitive buy and sell signal generators but primarily as trend and momentum confirmation tools to improve risk-reward profile and timing.
Forex market realities like manipulation possibility, short bursts of volatility and fear driven irrationality means prices frequently overextend or reverse prematurely even against dominant lagging signals. Sound confirmation reduces likelihood of acting rashly.
Specific examples:
● SMAs confirming support bounce: Price pullbacks that halt and reverse off long term SMA lines signal underlying buying appetite at perceived value zones from which continued upside can unfold.
● Oversold RSI divergence: Deeply oversold RSI reaching lower lows while price itself consolidates signals nearing momentum exhaustion to assume long trades.
● Historic support affirming floor: Often key 5 year or 10 year support levels containing extreme selling pressure inspire subsequent bounces for patient dip buyers.
● GDP contraction aligning with downtrend: An officially declared economic contraction period confirms risk-off Participants will short rallies.
In all cases, the lagging indications verify the probabilistic advantage behind a brewing new movement or trend persistence rather than blindly believing prices themselves at face value.
Combining Lagging Indicators + Leading Indicators
While lagging indicators tackle trend confirmation, leading indicators gauge future shifts ahead of the curve. Reliable trading setups frequently combine both facets:
Leading indicators like bullish investor sentiment surveys and rebounding jobless claims spot impending economic – and currency – recoveries ahead of time. Lagging indicators then confirm sufficient market acceptance once SMA trends indeed reverse higher or new breakouts above historic ranges unfold with volume backing.
Benefits of Lagging Indicator Trading
Several advantages accrue to traders thoughtfully applying lagging confirmations rather than just chasing every market wiggle:
● Avoid False Breakouts: Volatility from surprise news or large investor moves often temporarily pushes prices beyond underlying technical levels before mean reversion. Lagging indicators filter out false moves.
● Assess Momentum: Metrics like the ADX gauge trend strength. Strong ADX confirms active moves have backing to run further versus range trading likely ahead.
● Smooth Data Noise: Long term moving averages surface the broader trend direction from historic closing price data despite day to day whipsaws.
● Locate Key Levels: Previous support floors and volume profile nodes become veritable battlegrounds around which trading ranges form and reversals ignite after overextensions.
However, lagging indicators do carry intrinsic drawbacks. Namely signals manifest only after major moves get underway, risking missed opportunity from early entries. Additionally, conflicting signals do arise, forcing ultimate subjective interpretation of probabilities not guarantees.
Tying It All Together
In summary, leading indicators pinpoint developing currency moves and lagging indicators confirm those moves. One spots the wave first, the other tells you it’s time to start surfing.
Rather than a duplicative effort, the synthesis generates reliable high conviction setups harnessing both facets of market analysis. Combining the anticipatory power of sentiment surveys, policy shifts and fundamentals with the trend and momentum validation tools like SMAs and MACD allows confidently entering larger size trades.
The insights gleaned from lagging cross confirmation tilt the risk-reward profile favorable such that even capturing 20-30% of possible trend profits across few trades using tight stops turns handsome profits.
Indeed, for discretionary traders lagging indicators distill the complex back-and-forth of innumerable supply and demand variables across global macro markets into simplified visualizations.
Observing when present actions confirm or refute historical tendencies framed as long term moving averages or overbought conditions arms traders with a calculated method for engaging market noise rather than guessing with bare price action in isolation.
While hardly mystical crystal balls, thoughtfully leveraged lagging indicators prove critical tools for filtering out price distortions, gauging momentum and securing optimal entries for outsized forex success.
