Using Leading and Lagging Indicators for Perpetual Futures Trading

Leading and lagging indicators are technical indicators that generate effective trading signals that traders can use to improve their trading strategy. They are derived from various mathematical calculations applied to price and volume data.

At a Glance: What is the Difference Between Leading vs Lagging Indicators?

Feature	Leading Indicators	Lagging Indicators
Purpose	Predict future price movements and potential trend reversals	Confirm established trends and provide entry/exit signals
Data Source	Current price action, volume, and other market data	Past price data
Signal Timing	Provide early signals, allowing for anticipation	Provide delayed signals, confirming what has already happened
Reliability	Prone to false signals, especially in volatile markets	More reliable, but may miss opportunities due to lag
Examples	RSI, Stochastic Oscillator	SMA, MACD, Bollinger Bands

Why are Leading and Lagging Indicators Important?

Leading indicators can help identify potential entries, while lagging indicators confirm trends and provide more reliable trading signals for entering or exiting trades.

By combining the predictive capabilities of leading indicators with the confirmatory signals of lagging indicators, perpetual futures traders can develop a more robust strategy that adapts to changing market conditions.

What are Leading Indicators?

Leading indicators aim to predict future price movements and potential trend reversals. Such predictions are achieved by analyzing various aspects of current market behavior, such as comparing recent closing prices to the previous trading range, to identify potential breakouts.

1. Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a momentum oscillator that acts as a leading indicator. It measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset.

RSI is displayed as an oscillator (a line graph that moves between two extremes) and can have a reading from 0 to 100. Readings of 70 or above indicate that a security is overbought or overvalued and may be primed for a trend reversal or corrective pullback in price. An RSI reading of 30 or below indicates an oversold or undervalued condition.

However, it's important to remember that the RSI is a leading indicator and can generate false signals, especially in strong trending markets, and should be used in conjunction with other trading indicators.

2. Stochastic Oscillator

The Stochastic Oscillator is a momentum indicator that compares a security's closing price to its price range over a given period,typically 14 periods. By comparing recent closing prices to the previous trading range, traders can identify potential turning points in the market.

The Stochastic Oscillator consists of two lines: %K and %D. The %K line measures the current closing price relative to the high-low range over the specified period. The %D line is a 3-period Simple Moving Average (SMA) of the %K line.

The Stochastic Oscillator is also used to identify potential overbought and oversold conditions and signal potential trend reversals. It oscillates between 0 and 100. Readings above 80 generally indicate an overbought condition, suggesting that the price may be due for a pullback. Conversely, readings below 20 suggest an oversold condition, potentially signaling an upcoming price bounce.

For example, in August 2023, Bitcoin's (BTC) monthly Stochastic Oscillator turned lower from above 80, signaling overbought conditions and a loss of upward momentum. This indicator suggested that Bitcoin's price rally might be losing steam, prompting traders to anticipate a prolonged basing process or potential reversal.

As a result, traders could have considered exiting long positions to lock in profits or even initiating short positions to capitalize on the expected downturn. Additionally, some traders might have waited for further confirmation, such as a price break below key support levels, before committing to bearish positions.

What are Lagging Indicators?

Lagging indicators are derived from past price data and typically trail behind the price action. While lagging indicators may not predict future price movements, they can provide valuable insights into the momentum and sustainability of a trend, helping traders identify potential entry/exit points as part of their trading strategy.

1. Simple Moving Average (SMA)

The Simple Moving Average (SMA) calculates the average price of an asset over a specified period. It is calculated by summing the closing prices of an asset over a given number of periods and dividing the total by the number of periods. A 20-day SMA would be calculated by adding the closing prices of the last 20 days and dividing the sum by 20.

Traders use the SMA to identify the direction of a trend and potential support and resistance levels. When the price is above the SMA, it suggests an uptrend, while a price below the SMA indicates a downtrend. The SMA can also act as dynamic support or resistance, with the price often bouncing off these levels.

SMA can be applied to various timeframes in crypto perpetual futures, ranging from short-term intraday charts to long-term weekly or monthly charts. Traders can leverage SMA to identify both bullish and bearish trends and potential entry/exit points across different trading styles, whether they are scalping short-term fluctuations or aiming for long-term swing trades.

2. Moving Average Convergence Divergence (MACD)

Moving Average Convergence Divergence (MACD) measures the relationship between two moving averages of prices. It consists of three components:

MACD line: The MACD line is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA.
signal line: The signal line is a 9-period EMA of the MACD line.
histogram: The histogram represents the difference between the MACD line and the signal line.

Traders use the MACD to identify trend changes and momentum shifts. A bullish crossover, where the MACD line crosses above the signal line, suggests a potential uptrend, while a bearish crossover indicates a potential downtrend. The divergence between the MACD and the price action can also signal potential trend reversals, offering trading opportunities to adjust positions or enter new trades in the perpetual futures market.

3. Bollinger Bands

Bollinger Bands measure price volatility and potential overbought/oversold conditions. They consist of three lines: a middle band, an upper band, and a lower band. The middle band is typically a 20-period SMA. The upper and lower bands, also known as the outer bands, are calculated by adding and subtracting a specified number of standard deviations from the middle band.

Standard deviations, which can be positive or negative, represent the distance of the price from the middle band, providing a visual representation of price fluctuations relative to the average.

Traders use Bollinger Bands to identify periods of high and low volatility and potential trend reversals. When the price touches the upper outer band, it suggests an overbought condition, while a touch of the lower outer band indicates an oversold condition. A breakout outside the outer bands can signal a significant price movement.

How To Combine Leading and Lagging Indicators for an Effective Trading Strategy

Traders can combine leading and lagging indicators to better inform their view of the market and improve the accuracy of their trading signals, allowing them to confirm trends, identify potential reversals, and filter out false signals.

Confirming Breakouts with RSI and SMA: The Relative Strength Index (RSI) and Simple Moving Average (SMA) and be used to filter false breakouts and anticipate potential overbought or oversold conditions. An overbought condition where the price breaks above a key resistance level can indicate a potential uptrend.
Identifying Trend Reversals with Stochastic Oscillator and MACD: When the Stochastic Oscillator indicates an overbought or oversold condition and the MACD shows a divergence with the price action, it can signal a potential trend reversal. This combination allows traders to anticipate trend changes and adjust their positions accordingly.

How Best to Use Leading and Lagging Indicators for Perpetual Futures Trading?

1. Filtering False Signals

Leading and lagging indicators can generate false signals, potentially leading to poor trading decisions. Seasoned traders employ various techniques to filter out false signals and improve the reliability of their indicators.

One technique is to use multiple indicators for confirmation. For example, a trader might look for confluence between the MACD, the RSI, and Bollinger Bands before entering a trade. Another technique is to consider the market context and other factors, such as news events, open interest, and trading volume. Analyzing price action and candlestick patterns can also help filter out false signals and identify more reliable trading setups.

2. Optimizing Indicator Parameters

The parameters of technical indicators, such as the period of an SMA or the deviation of Bollinger Bands, will directly impact their accuracy in reading market sentiment. Seasoned traders will be able to adjust these parameters based on their trading styles and market conditions.

A trader who focuses on short-term scalping might use a shorter period for the SMA, while a swing trader might prefer a longer period. Similarly, the deviation of Bollinger Bands can be widened or narrowed to reflect the volatility of the asset being traded, with wider deviations to capitalize on price swings and narrower deviations to identify potential squeezes.

3. Incorporating Positive and Negative Standard Deviations

Standard deviations can be used in conjunction with Bollinger Bands to identify significant price movements and potential trend changes. A move outside one standard deviation from the middle band can signal a moderate price movement, while a move outside two or three standard deviations can indicate a more significant price swing.

Traders can also use standard deviations to set profit targets and stop-loss orders. For example, a trader might set a profit target at two standard deviations above the middle band and a stop-loss order at one standard deviation below the middle band.

Setting a profit target at two standard deviations above the middle band works because the upper Bollinger Band often indicates overbought conditions. Traders set profit targets here to capitalize on potential price peaks before they fall back.
A stop-loss at one standard deviation below the middle band helps protect against bigger losses. If the price drops below this level, it suggests the trend is weakening. Doing so allows for minor fluctuations while cutting losses if the market shifts direction.

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Sign up for an account on the Flipster website or by downloading the Flipster app (Android or Apple).
Click the [Trade] tab.
Search for your preferred cryptocurrency and click on it.
Select the leverage (up to 100x).
Select either a Trigger Order or Market Order.
Enter the amount of coin you want to trade or choose a percentage of your available funds.
Once you have confirmed the details, click the [Long] or [Short] button to open a position.