Why All Indicators Are Lagging

Lesson #1 – JCL’s Forex Mini-Course

Let’s begin with why all indicators are lagging and what that means to you. Interesting fact, over 90% of traders use indicators on their charts in order to help them gauge the market. I use them too but we will get into why in tomorrow’s lesson. First let’s understand why indicators are lagging and how you can use that knowledge to gain an edge in your trading.

I always like approaching things, especially those as complex as the markets, by keeping things as simple as possible. There are many types of indicators ranging from trend indicators, momentum indicators, volume indicators to many types of oscillators. They are all used to help use understand why the current market price is trading where it is and where it is expected to move next.

The problem with indicators helping us to know what the future price is expected to be is that ALL indicators use PAST price data in order to sum their calculations.

All indicators are lagging because they all use past price in order to formulate their current calculations.

In other words indicators are reflecting PAST price behavior.

Let’s take a look at a graph to illustrate this..

Let’s look at a chart with the popular MACD indicator attached. I highlighted with a yellow circle as a point of interest to help you understand how all indicators are lagging.

First focus on the MACD bars in the circle itself. Notice how the middle of the three bars is making a lower low than the previous bar. The MACD itself is negative and is making lower lows, clearly a bearish move.

Now move your eyes up on the chart and look at how price has had a breakout to the upside moving more than 100 pips in just an hour.

If you were using the indicator to help you make trading decisions by the time the following bar prices in the up move it is too late to enter as price has ALREADY made it’s move which is why it is then showing up on the indicator.

Pretty clear how price leads and indicators follow. Go ahead and take a look at some charts today looking at any indicator you choose and notice how this repeats over and over again. Price moves and then the indicator reflects the price move afterwards.

I am not recommending to trade with price alone rather it is just important you first understand why all indicators are lagging before you use them so that you can utilize them in the most profitable way instead of continuing to chase their signals as they chase past price movements.

Lesson #2

In tomorrow’s lesson I will show you ‘Why I use Indicators to Trade‘ and also share those indicators with you so that you can set your charts up like mine.