Lagging Indicators are best used to define movements that have already occurred. Sure, they’re not solely used to help predict the future (like Leading Indicators), but they’re still incredibly useful, and should not be overlooked.
Key points on Lagging Indicators
- Lagging indicators look at the past.
- Lagging indicators can change as newer data is added.
- Lagging indicators are commonly used for ‘confirmation’ that a signal/pattern has played out.
Let’s dive deeper into:
- What lagging indicators are
- Lagging indicators vs leading indicators
- Examples of lagging indicators.
What are lagging indicators?
To refresh: lagging indicators are indicators that use past data, to confirm that something has occurred.
Lagging indicators vs Leading indicators
For example, a lagging indicator could be a smoke alarm. Whereas a leading indicator could be a heat alarm.
Examples of Lagging indicators
Moving averages are lagging indicators. That’s because they take previous price data on a rolling basis, confirming price movements and trend.
What you need to know
Some lagging indicators change as newer data is input. For example, when the indicators are built up of moving averages that later look forward, the previous moving average points will move to better fit the price.
Make sure you understand the base Math behind the indicator. Indicators that later adjust, may look like they’ve performed perfectly over time. But in fact, they’re simply adjusting to the price as new data is added!
You do not want to go ‘all-in’ on a lagging indicator that you thought was leading, only to come back and realize the indicator has adjusted itself, and the signal seemingly never occurred.
They are powerful tools for confirming trend and reversals. Despite that, when armed with the knowledge of the potential pitfalls, it will save you from misusing them.