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A lagging indicator is a type indicator that gives a signal after a trend or reversal has started. This means that lagging indicators tend to have smaller rewards as the signal would have already of been spotted by the leading indicator. However, lagging indicators are less risky, and are more likely to be correct in signalling a trend.

There are two main lagging indicators, that are both examples of trend-following (momentum) indicators. Lets take a look at them, below.

 

 

Moving Averages

The moving average (MA) is a widely used indicator in technical analysis that helps ‘smooth’ out price action (raw price displayed on a chart) by filtering out noise from random, short-term price fluctuations. 

The MA is a trend-following (lagging) indicator because it is based on past prices. A MA takes the average closing price of a currency pair for the last ‘X’ number of periods.

moving average

There are different types of moving averages, each of which has their unique level of ‘smoothness‘.

 

The smoother the moving average is, the slower the moving average will react to the price movement.

The choppier the moving average is, the quicker the moving average will react to the price movement.

 

To make a moving average smoother, you should collect the average closing prices over a longer time period.

 

simple moving average

 

The two most basic and commonly used moving averages are the simple moving average (SMA) and exponential moving average (EMA).

The SMA is the average price over ‘X’ period of time. It is calculated by adding up the last ‘X’ period’s closing prices, then dividing that number by ‘X’.

An SMA tells us whether a pair is in an uptrend, downtrend, or just ‘ranging’. However, SMAs are susceptible to spikes (outliers) in prices, which can disarray the indicator. When this happens, the SMA can produce false signals. We might think that a new trend may be developing but in reality, nothing changed. The EMA, aims to solve such a problem.

An EMA is a moving average that gives greater weight to more recent prices, therefore being less susceptible to outliers over a period of time, producing more accurate signals. 

 

WHEN to use SMA:
In smooth market conditions.

WHEN to use EMA:
In choppy market conditions.

 

 

Bollinger Bands

Bollinger Bands, developed by John Bollinger, is an indicator used to measure the volatility of price.

In theory, Bollinger Bands are used by traders to evaluate whether the market is smooth or choppy.

When the market is smooth, the bands contract. When the market is choppy, the bands expand.

 

bands contract bands expand

WHEN to use Bollinger Bands:
Bollinger Bands are useful in any market condition.

LESSON SUMMARY:

– A lagging indicator is a type indicator that gives a signal after a trend or reversal has started.

– The moving average (MA) is a widely used indicator in technical analysis that helps ‘smooth’ out price action by filtering out noise from random, short-term price fluctuations. 

– Bollinger Bands, developed by John Bollinger, is an indicator used to measure the volatility of price.

Lesson tags: free forex course
Back to: Free Forex Course > Step 7 - Technical Indicators
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