eToro platform offers a wide variety of trading indicators for you to choose from and it may be quite challenging to navigate amongst them and choose a few for your trading. There are two generally distinguished groups of indicators, leading and lagging, that differ in the way they are constructed and interpreted. What they are, how they differ and how you can use them in your trading process on eToro platform? You can find answers to these questions in the quick guide below.
Lagging indicators
Lagging indicators, also referred to as trend indicators, are ‘backward looking’ and are constructed based on past prices of an asset. They are the most common type of indicators and are used for clarification and confirmation of a price pattern that is already progress at the time as well as to spot suitable entry and exit conditions for trades. As the name implies, these indicators are lagged as they are created by averaging previous price points of an asset and therefore the market may make a move before the indicator spots it. Despite this minor delay lagging indicators may be indicative of the momentum the price is gaining and therefore serve as a confirmation for price action; this could add additional confidence to your trading decision.
Lagging trend indicators can help understanding whether the market is ranging, moving upwards or downwards, or trading sideways. In order to determine how far the price is likely to move before a retracement occurs, traders may consider using mean reversion indicators such as the Bollinger Bands. Examples of such lagging indicators available on eToro are a Simple Moving Average (SMA), Moving Average Convergence Divergence (MACD), Relative Strength Indicator (RSI) and Stochastic Oscillators (on the image below), although the two last indicators can be considered as both leading and lagging indicators.
Leading Indicators
Although these indicators are also based on past prices, they are used to foresee future price trends, indicating where to the price is likely to move next. The advantage of this indicator then comes from its ability to potentially indicate a point for traders to enter or exit trades before the actual price move. It is important to remember that these indicators only provide an indication of how the price may possibly move without any certainty; markets are very volatile and at times the price may not divert into the direction of the indicator. You should therefore be aware of incorrect breakout signals, where you may falsely interpret mere retracements as major trend reversal points.
Support and Resistance levels are some of the most common leading indicators. Another good example of a leading indicator are the Fibonacci retracements which try to forecast future movement of a price; you can also consider Donchian channels, that may be used to assess asset’s volatility, potential breakout and retracement points as well as oversold or overbought conditions, like on the image below.
Which type of indicators to use on eToro?
By their nature, indicators cannot promise any certitude in their signal but they do provide an indication of possible price movements. Traders that need a fast signal may opt for leading indicators; however, setting a shorter time period on lagging indicators may also increase their responsiveness. There is also a danger of false signals developed by leading indicators, especially in case of very volatile markets and when a trader is relatively unexperienced. You may consider using stop-loss as a way to protect yourself from unexpected price movements in the opposing direction; eToro also offers a more flexible option of trailing stop-loss so that you do not miss out on any trading opportunity.
Traders who prefer to trade longer time frames and want to take advantage of a continuation of a momentum may opt for lagging indicators, with a combination of risk management techniques. The issue with lagging indicators is the fact that they are delayed, and because of this waiting period there is a danger of being late for a few pips. This a cost some traders accept to be able to see a simplified clear indication of price action.
As you can probably see, one type of indicators is not better or worse than the other, and the choice depends on your personal preferences, trading strategy and time frame. There is always the option of using several indicators in combination, for example support and resistance levels with an oscillator. The exact classification of whether the indicator is lagging or leading is likewise not as vital as the way in which a trader uses and interprets it, as well as incorporates the right risk management tools, such as position sizing or stop-loss.
Hopefully now you have a better understanding of what the two types of indicators, lagging and leading, are and how you can use them on eToro. Beware that trading involves capital loss risk and enjoy trading on eToro! Best of luck.
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