Technical Indicators Lag

Technical indicators are a set of analytic tools used to detect pricing trends and to predict future movements in price. They can be classified according to the kind of forecasts or indications that they make and categorized into three types: leading, lagging, and coincident. A lagging indicator is an economic factor or event which occurs after a change in the economy has already happened and a new pattern or trend is being followed. Nearly all technical indicators can be considered a lagging indicator. Moving averages, MACD, Stochastic, and RSI are all lagging indicators. Initially, there is a movement in price, and then later on, the indicator signals buy or sell. This is why lagging indicators are called lagging indicators — they lag behind market action. They do not lead the price action but instead follow and are designed to get traders in and keep them in for as long as the trend remains intact. The lag — the length of time after a price movement has occurred, is used predominantly to identify long-term trends, as opposed to predicting them.

Lagging indicators can be divided into two categories – economic and technical. Examples of economic lagging indicators include business profits, labor costs, and the most commonly used lagging indicator – the unemployment rate. If the unemployment rates are increasing, it is generally accepted that this is an indication that the economy is performing badly, whereas falling unemployment rates indicate an economy in good health. The technical lagging indicator trails the overall economic cycle over a longer period of time than the economic indicators, usually 6 months, as opposed to moving with it which coincident indicators tend to do, or moving ahead of the economic cycle; a task performed by leading indicators. The MACD (moving average convergence divergence) is a good example of a technical lagging indicator, which because of the length of time of the lag, can mean a risky late market buy/sell.

Although not as influential as the leading indicators or held in as high a regard by traders, the technical indicators lag can offer a great insight into the behavioral activity of the economy over the medium to long term. When the analysis is used correctly, it can assist heavily in the prediction of an economy’s behavior with traders finding the lagging indicator a very useful tool to generate buy or sell signals and to provide confirmation of a given trends strength. The biggest downside to using lagging indicators and trading from a technical indicator's lag is that the signals are by nature late, and as with all trend-following indicators late entry and exit points for traders can adversely affect the risk-to-reward ratio — something all traders should be keen to avoid.