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Lagging Indicators

Lagging Indicators

Student's Question:I have used the MACD indicator for some time, but it is always slower than the real trade that moves in the market .

I find it is hard to find any indicator that could be used for a well-timed entry.What can I do?Instructor's Response:All indicators are going to "lag the market" to a greater or lesser degree since they are all based on an average of price action that has already taken place. The longer the chart time frame we examine or the greater the number of periods analyzed by the indicator, the more of a lag that we will see. (However, the longer the time frame, the more reliable the signal will be since it is taken from a greater amount of data.)Even though every trader would like to be in on the very first pip of a move, it is fine to miss the initial move that a pair makes in favor of entering a trade that has a greater level of confirmation behind it. If we are looking to enter a trade at the very first sign that a move may be taking place, we are going to find ourselves entering trades based on very short term signals and, consequently, we will be basing our trades on what ultimately can turn out to be a "false" entry signal.

While will give up some pips at the beginning, the lagging nature of indicators on longer time frames will get us into trades that have a bit more confirmation behind them.Take a look at the historical chart of the GBPCHF below for an example…

Lagging_Indicators_body_47679d1264466795-post-day-chart-1-25-10.png, Lagging Indicators

If we enter this trade at the point when the MACD line crosses the Signal line, we forgo the profit between point A and point B on the chart due to the lagging nature of MACD. However, when we enter this move after it is confirmed by the MACD we set ourselves up for the potential profit represented between point B and point C on the chart. As can be seen in this example, one can be a successful trader even though they are not capturing the initial pips in a move.All in all, I would rather enter a trade late and be right then enter early and be wrong.