In this
lesson, we're going to streamline your use of these chart indicators.
We want
you to fully understand the strengths and weaknesses of each tool, so you'll be
able to determine which ones work for you and which ones don't.
Let's discuss some concepts first. There are two types of
indicators: leading and lagging.
A leading indicator
gives a signal before the new
trend or reversal occurs.
A lagging indicator
gives a signal after the trend
has started and basically informs you "Hey buddy, pay attention, the trend
has started and you're missing the boat."
You're
probably thinking, "Ooooh, I'm going to get rich with leading
indicators!" since you would be able to profit from a new trend right at
the start.
You're
right.
You would
"catch" the entire trend every single time, IF the leading indicator
was correct every single time. But it won't be.
When you
use leading indicators, you will experience a lot of fakeouts. Leading
indicators are notorious for giving bogus signals which could
"mislead" you.
Get it?
Leading indicators that "mislead" you?
Haha. Man
we're so funny we even crack ourselves up.
The other option is to use lagging indicators, which aren't as prone to bogus signals.
Lagging
indicators only give signals after the price change is clearly forming a trend.
The downside is that you'd be a little late in entering a position.
Often the
biggest gains of a trend occur in the first few bars, so by using a lagging
indicator you could potentially miss out on much of the profit. And that sucks.
It's
kinda like wearing bell-bottoms in the 1980s and thinking you're so cool and
hip with fashion....
For the purpose of this lesson, let's broadly categorize all of
our technical indicators into one of two categories:
1. Leading
indicators or oscillators
2. Lagging,
trend-following, or momentum indicators
While the
two can be supportive of each other, they're more likely to conflict with each
other. We're not saying that one or the other should be used exclusively, but
you must understand the potential pitfalls of each.
