What Are Leading and Lagging Indicators
What Are Leading and Lagging Indicators
When it comes to crypto trading, it's easy to get overwhelmed by the sheer amount of information available. Charts, graphs, news, and opinions bombard you from all directions. To make sense of it all and make informed trading decisions, you need technical indicators to help you interpret market data.
There are two main categories of technical indicators. Leading indicators attempt to predict future price movements. They give you a heads-up about where the market might be going. Lagging indicators, on the other hand, confirm trends and patterns that have already formed. They help you validate what's happening in the market.
Let’s explore some common examples of both categories in crypto and how you can use them to make smarter trading decisions.
Common Leading Indicators for Cryptocurrencies
Relative Strength Index (RSI)
The Relative Strength Index (RSI) is considered a leading indicator because it often shows signs of changing momentum before the price actually reverses, helping you anticipate potential trend reversals by identifying where price momentum diverges from the actual price action before it shows up on the chart.
How to Use RSI on Flipster
You can use the RSI indicator on Flipster to help you decide whether to buy or sell a cryptocurrency.
Open the Flipster app and select the cryptocurrency you want to analyze.
Tap on the "Indicators" button and select "RSI."
Adjust the RSI settings if needed (the default is usually 14 periods).
Observe the RSI line in relation to the price chart. An RSI above 70 indicates an overbought asset, an RSI below 30 suggests an oversold asset.
Look for potential divergences between the RSI trend and the price of the cryptocurrency.
On Balance Volume (OBV)
On Balance Volume (OBV) is considered a leading indicator because it uses changes in volume to predict future price movements. It's based on the idea that volume precedes price, so rising volume can sometimes signal an impending price increase.
How to Use OBV on Flipster
You can use the OBV indicator on Flipster to help you confirm price trends or anticipate potential breakouts.
Open the Flipster app and select the cryptocurrency you want to analyze.
Tap on the "Indicators" button and select "OBV."
Observe the OBV line in relation to the price chart. If the OBV line is rising while the price is consolidating, it could suggest that buying pressure is building up and an upward breakout may occur.
Conversely, if the OBV line is falling while the price is consolidating, it could suggest that selling pressure is building up and a downward breakout may occur.
How Leading Indicators Affect Your Trades
Let's say you're monitoring the price of Ethereum and notice it's approaching a previous resistance level around $2,100.
Check RSI: You open Flipster and add the RSI indicator to your Ethereum chart. You see that the RSI is around 60, suggesting decent momentum but not yet in overbought territory, giving you a preliminary indication that there might be room for further upward movement.
Confirm with OBV: You also add the OBV indicator. You observe that the OBV has been steadily rising, even as the price has consolidated near the resistance level. This suggests increasing buying pressure, which could lead to a breakout above $2,100.
Anticipate a Breakout: Based on the RSI and OBV readings, you anticipate that Ethereum is likely to break above the resistance level.
Adjust Your Position: You decide to enter a long position on Ethereum, setting a stop-loss order below the recent support level to manage your risk. You believe that if Ethereum breaks above $2,100, it could trigger a further upward move towards the next resistance level.
Common Lagging Indicators for Cryptocurrencies
Moving Averages
Moving averages are considered lagging indicators because they are based on past close prices. Traders use this indicator to smooth out price fluctuations and find potential support and resistance levels. There are different types of moving averages:
Simple Moving Average (SMA): Calculates the average price over a specific number of periods. It gives equal weight to all prices in the calculation.
Exponential Moving Average (EMA): Gives more weight to recent close prices, making it more responsive to price changes than the SMA.
Weighted Moving Average (WMA): Assigns different weights to each period's price, typically giving more weight to more recent prices. This makes it more responsive to recent price changes than the SMA but less so than the EMA.
How to Use Moving Averages on Flipster
You can use moving averages on Flipster to help you make informed trading decisions.
Open the Flipster app and select the cryptocurrency you want to analyze.
Tap on the "Indicators" button and select "MA" (for Moving Average).
Choose the type of moving average you want to use (SMA, EMA, or WMA) and the period (e.g., 20, 50, or 200).
Observe how the moving average line interacts with the price chart. If the price is consistently above the moving average, it could suggest an uptrend. If the price is consistently below the moving average, it could suggest a downtrend.
Look for potential trend reversals when the price crosses above or below the moving average.
Bollinger Bands
Bollinger Bands are considered a lagging indicator because they are calculated based on a moving average, which uses past close prices. They help you visualize volatility and identify potential trend reversals and breakouts from support and resistance levels. The indicator consists of three lines: a simple moving average in the middle, an upper band, and a lower band.
How to Use Bollinger Bands on Flipster
Open the Flipster app and select the cryptocurrency you want to analyze.
Tap on the "Indicators" button and select "BB" (for Bollinger Bands).
Observe the width of the bands. Narrow bands suggest low volatility, while wider bands indicate high volatility.
Look for potential breakouts when the price close prices move outside of the bands. A breakout above the upper band could suggest a strong upward movement, while a breakout below the lower band could suggest a strong downward movement.
Look for potential trend reversals when the price bounces off the upper band or lower band.
H2 How Lagging Indicators Affect Your Trades
Now, imagine that Ethereum has successfully broken above the $2,100 resistance level.
Confirm the Trend with Moving Averages: You check the 20-day and 50-day moving averages. You see that the price has closed above both of these moving averages, confirming the strength of the upward trend.
Assess Volatility with Bollinger Bands: You add the Bollinger Bands indicator to your chart. You observe that the bands are widening, indicating increasing volatility. The price is also "walking the upper band," suggesting a strong and sustained upward movement.
Validate Breakout with Bollinger Bands: You notice that the price breakout above $2,100 coincided with a breakout above the upper band of the Bollinger Bands, further confirming the strength of the breakout and the potential for further upward movement.
Adjust Your Position: Based on the confirmation from the lagging indicators, you decide to hold your long position on Ethereum and potentially even add to it, anticipating further gains. You might also consider trailing your stop-loss order to lock in profits as the price moves higher.
Trade on Flipster
Sign up for an account on the Flipster website or by downloading the Flipster app (Android or Apple).
Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.