Lagging Indicators
From Timetotrade
In the world of technical analysis, trend following indicators such as the MACD or Moving Average are examples of 'lagging' indicators. Trending indicators are indicators that help you establish the trend of the underlying price movement. The buy and sell signals derived from the use of trend following indicators typically lag the price pivot point at which the trend changes direction.
The use of Leading & Lagging indicators is not limited to technical analysis and there are a variety of economic indicators, such Wage, Inflation, Employment or Consumer Confidence produced by the bodies such as the UK National Statistics office, the US Department of Labor, or the Consumer Confidence Board; as with the technical analysis indicators, these indicators are used to try determine future market direction. In this help section we will focus on lagging technical analysis indicators and their associated characteristics.
Consider the following Walgreen (WAG) charts that represent the 1 year price and corresponding MACD charts based on a weekly interval period:
In this example the MACD works well as a trending indicator i.e. when the price is in a negative trend the MACD is trending lower and when the price is in a positive trend the MACD is trending higher as illustrated by the red arrows on the Walgreen chart above. A positive MACD crossover is formed when the green line, rises above the red line and this is an indication of a change from a negative to a positive trend. A negative MACD crossover is formed when the green line drops below the red line and this is an indication of a change from a positive to a negative trend.
The MACD crossovers do not provide an indication of a change in trend until after the event has occurred, hence the term 'lagging' indicator. This typically results in traders entering late into an established trend and exiting after the trend has reversed, however traders that use lagging indicators consider this strategy to be of lower risk as opposed to using leading indicators to try and determine the exact pivot point at which the trend changes. You can use the timetotrade MACD triggers to create alerts to notify you when there is a positive or negative MACD crossover as illustrated in the above image.
Lagging indicators typically are more effective when the underlying equity is trending i.e. when the price movement is consistently setting higher highs and higher lows while in an upward trend, followed by a period when the price movement is consistently forming lower highs and lower lows and so on. Lagging indicators are not effective when used in market conditions where the underlying price movement of the equity is trading sideways or without a definite trend such as being tightly range bound between support and resistance levels or trend lines.
For example lets take another look at Walgreen this time using a 50 day Exponential Moving Average.
When Walgreen was trending the moving average produced 'clean' buy and sell signals. However in early 2007 when Walgreen started to trade sideways, the moving average indicator started to produce 'noisy' or 'false' buy and sell signals. As with the MACD indicator, you can use timetotrade moving average triggers to create alerts to notify you when the price rises above or falls below the moving average.
Further Reading
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