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.
- Lagging indicators look at the past.
- Lagging indicators are commonly used for ‘confirmation’ that a signal/pattern has played out.
- Lagging indicators can change as newer data is added.
Let’s dive deeper into:
What are lagging indicators?
Lagging indicators are indicators that use past data to confirm that something has occurred. For example, a lagging indicator could be a smoke alarm. Whereas a leading indicator could be a heat alarm.
Lagging indicators are generally bucketed into 3 areas:
Types of lagging indicators
1. Trend indicators
Trend indicators confirm a trend is in play or has reversed. For example, moving averages. MAs show the average price over time, but lags behind by a set number of periods.
2. Mean reversion indicators
Mean reversion indicators confirm a price has reverted to the mean. In short, when price moves away from an average (mean) price, it tends to revert to the mean.
3. Volume indicators
Volume indicators give information based on volume. They’re lagging because they can’t be calculated until the volume metrics are available. Of course, you could take a different approach and make a guesstimate on future changes, but this would be a leading indicator.
Lagging indicators vs Leading indicators
This is a blurry area. Many indicators are both leading and lagging, dependent on what they’re being used for. But, for the most part, lagging indicators are indicators we use to confirm a pattern or change has definitively occurred.
More points on lagging indicators
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.
List of lagging indicators
Lagging Indicators 101 Summary
- Lagging indicators are used for confirmation.
- They should not be used to predict the future.
- Some indicators are both leading and lagging, in which case, they can be used for prediction.