Pocket Option has a great variety of indicators of different types available for its users. These are widely used for technical analysis in trading to identify trend directions, reversals, spot the best entry and exit points. There are two big groups of generally distinguished indicators, leading and lagging. How are they different and when to use which one in your trading? Let’s try to answer these questions in the article below.
Lagging indicators are calculated based on historical price data; they are called ‘lagging’ because there is a small delay in the information that they provide. They are often used to confirm and clarify a certain pattern that is happening over a time period rather than indicate possible future price movement. For example, once a trader identifies a potential point to enter a trade, they can use a lagging indicator to confirm it after some time and open a position with a greater degree of confidence. The disadvantage of course is the delay in the information of such indicators, as some valuable time may be lost; also, do not forget that there is always some uncertainty in signals generated by any indicators.
Lagging indicators available on Pocket Option include the Simple Moving Average (SMA), Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), and so on. For example, moving average indicators are calculated by taking an average of asset price points over a time period, which you can specify on Pocket Option; often two MA’s are used together, and buy or sell signals are then indicated by the cross-over of the two lines:
Although this group of indicators is also based on past price data, they are used to identify potential future price movement trends. Leading indicators generate signals which suggest opportunities for entry or exit points i.e. before there is a change in the trend or a reversal; a trader can then open a position when these favorable conditions form on the market. The problem with leading indicators comes from the fact that since signals generated provide only possible price trend indications, they can sometimes be false, especially when markets move quickly and unexpectedly. Because of this, they are often used in combination with other tools of technical analysis.
Some of the leading indicators on Pocket Option include the Donchian channel, Ichimoku Kinko Hyo, Awesome Oscillator, etc. For example, the Donchian channel is made up of three lines, upper (highest asset price over time), lower (lowest price over time), and middle lines (average), gets wider with increasing volatility and helps to identify breakout points:
Which one to use?
As we have seen by now, leading indicators are used to anticipate (predict) the potential market direction, while lagging indicators generate a signal after a certain price change has already happened or is in process of happening. Leading indicators, therefore, allow anticipating a market change before it actually happens and opening a trade according to this prediction (given that the signal is correct), while lagging indicators are used to confirm a trend before opening a position.
Leading indicators are very responsive to price changes and may be suitable for traders that focus on short-term trading. This can be quite risky, especially for beginner traders, as false signals can be generated (which happens often when markets are volatile). Lagging indicators are slower in their response to market shifts but can be useful for positions that are left open over a long time; signals they generate are also generally considered to be stronger. Often a combination of several technical tools is used in trading, for example, an oscillator together with the support and resistance levels. It is a good idea to practice your skills of using technical indicators on a Pocket Option Demo with virtual funds account to find out which ones suit you the best.
Hopefully, this guide gave you a good overview of leading and lagging indicators, and how they can be used: leading indicators are used to anticipate the future potential price trend while lagging indicators give signals after or during a price change. It is a good idea to understand the two groups of indicators but in the end, the choice of the indicator will depend on your skills and trading strategy.
Best of luck and enjoy Pocket Option!
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