Q.1. (a) Explain Leading and Lagging indicators in detail. Also, give examples of each of them. (b) With relevant screenshots from your chart, give a technical explanation of the market reaction on any of the examples given in question 1a. Do this for both leading and lagging indicators?
LEADING AND LAGGING INDICATORS
Leading indicators are technical indicators that tell the movement of price in the future. They indicate that the price will take a certain turn upwards or downwards before the price moves. This type of indicator is quite interesting as it is used by traders who want to try to forecast the future price movement.
There's no need saying that accurate price forecasting is be a very valuable and coveted skill and traders will generally snap up the chance if they see one. This will help them maximize profits during trades and reduce their stoploss.
Mostly, leasing indicators give off their signals through indicating overbought and oversold conditions. This implies that these indicators are mostly oscillators which tell of the price and can give off weak or correction signals.
Note that although we it's a sign of a trend reversal when the price goes into the overdrive, either oversold or overbought, the market can be manipulated and price can stay in the overbought or oversold regions for much longer.
Examples of leading indicators includes Williams Percentage Range (WPR), RSI, Stochastic, etc.
Above is an example of a leading indicator which is Williams Percentage Range indicator, showing a future trend reversal. We can also see the price react in confirmation of the indicated future trend as indicated by the leading indicator.
Lagging indicator tells its meaning from the name. It comes behind the price literally. This type of indicator tells you the price trend after the trend has already started. You know, if you have other ways of identifying trends, then a lagging indicator will be your confirmation tool.
It however is not prime to giving false signals during market manipulations be side it confirms signals first before sending them out. Using them will require the trader to apply very huge stoplosses and will also cause the trader to enter a trend much later.
Examples of lagging indicators includes Moving Average Convergence Divergence (MACD), Parabolic SAR, etc.
Above is an example of the MA lagging behind the price in its indication. It shows the trend after it has begun, depriving the trade of early entry.
Q.2. (a) What are the factors to consider when using an indicator? (b) Explain confluence in cryptocurrency trading. Pick a cryptocurrency pair of your choice and analyze the crypto pair using a confluence of any technical indicator and other technical analysis tools. (Screenshot of your chart is required ).
When choosing an indicator, there are a few things to consider. They include:
Trading strategy: The trading strategy deployed by the trader will by an large affect the settings of the indicator they'll use as well as the type of indicator. A day trader for instance has no business with a lagging indicator on his day timeframe chart neither do they need a long period setting for their Moving Average.
Market trend: Round pegs won't fit square holes, so also trending indicators won't be suitable for ranging markets. When a market is trending, usually, trend based indicators are suitable for them but the reverse is the case fore a ranging market. Here, momentum based indicators are the key to profiting from such markets.
The type of indicator: We earlier mentioned lagging and leading indicators. When using an indicator, it is safe to say identifying the indicator type will help to defend against false signals. When we identify that we're using a leading indicator, we put into perspective the possibility and false signals and bother to use a confirmation on any signal given by the indicator.
Confluences: This is for the purpose of confirmation. In a volatile environment like the crypto market, confirmation of predictions and signals may never be too much. With confluences, we can see another technical analysis tool confirming the signal from the indicator.
CONFLUENCE
Confluence in crypto trading is when some other technical tool helps to confirm the signal given by a technical indicator. This enables the trader to be more sure of the signals they're about trading with. It is very important in trading using technical indicators as it reduces the chances of fakeouts.
Let's consider the SOL/USDT chart below
We see from the image above, the RSI showing a bullish trend by forming a steep ascending contour above the 50-mark. Above the RSI is the price movement forming higher lows, confirming the bullish trend shown by the RSI.
Q.3. (a) Explain how you can filter false signals from an indicator. (b) Explain your understanding of divergences and how they can help in making a good trading decision. (c) Using relevant screenshots and an indicator of your choice, explain bullish and bearish divergences on any cryptocurrency pair.
One of the ways we can filter out false signals is by checking with the market reaction. If the market reaction does not confirm to the signal being given by the indicator, then the signal is false. However, of the market conforms to the signal the indicator is giving, then it confirms the signal to be accurate.
DIVERGENCES
Divergence happens when the leading indicator usually a momentum based indicator, forms a higher low while the price action forms a lower low or when she indicator forms a lower high while the Price Action forms a higher high within the respective over drive region
Below, I'll explain bullish and bearish divergences using the Williams Percentage Range indicator.
BULLISH DIVERGENCE
When the indicator forms a higher low in the oversold region, and the price action forms a lower low, then it is a bullish divergence as the price is bound to reverse upwards.
BEARISH DIVERGENCE
When the indicator forms a lower high in the overbought region, and the price action forms a higher high, then it is a bearish divergence as the price is bound to reverse downwards.
HOW DIVERGENCE HELPS IN MAKING GOOD TRADING DECISIONS
Divergences help in making good trading decisions because when they occur, they indicate a very high probability of a market reversal. The trader can make guided trading decisions and since this comes mostly from leading indicator, the trader can make these correct and guided trading decisions on time.
CONCLUSION
The importance of trading indicators cannot be overemphasized. It is however imperative to understand our trading strategy when trading with indicators as well as the type of indicator and the market trend in order to avoid wrong application of these technical indicators.
We can also avoid false signals by looking out for DIVERGENCES and confluences which occurrence helps to clearly pinpoint accurately the most probable movement of price.
When the indicator shows a trend before price forms the trend, we say the indicator is a leading indicator as it tells of future trend. When it shows a trend only after the trend has begun, then we dub it a lagging indicator.
Thanks for reading
Cc:
@reminiscence01
Hello @jehoshua-shey , I’m glad you participated in the 4th week Season 4 of the Beginner’s class at the Steemit Crypto Academy. Your grades in this task are as follows:
Observations:
Your chart here is not clear on bullish divergence. There's no market structure indicating that movement of price and the indicator are in opposite direction.
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