In this article we will talk about the phenomenon of late or early indicators in online trading. Many novice traders base their trades exclusively on indicators, place several of them, which often indicate signals against and when they lose, they feel frustrated without understanding that a trade cannot be based solely on signals given by indicators because almost all indicators are late, which means that they follow or indicate what the price has already done.
Technical indicators can be divided into different groups according to their purpose. Since the objectives of the indicators are different, a trader does not need a single indicator, but a combination of several indicators to help him establish the conditions for opening or closing a trade.
In this article we will divide the technical indicators into two different types:
- Indicators in advance of the price;
- Indicators lagging behind price,
which generally differ in what they show the user.
Indicators In Advance Of Price, What They Are And When To Use Them
The indicators in this category are those created to precede the price movements of a financial instrument in the market, which gives them a certain degree of predictive quality. Two of the most important indicators of this type are:
- the RSI (Relative Strength Index);
- the stochastic oscillator.
Normally indicators of this kind offer more reliable signals during periods when the market moves in intervals without a defined trend, while indicators lagging behind the price are more accurate during periods when there is a trend. In this case, the trader must ensure that the indicator goes in the same direction as the trend to have more confidence in its signals.
These types of indicators often provide buying and selling signals that make them more suitable in markets without a defined trend, rather than in markets with a trend where it is better to have few signs of entry and exit. This is because these indicators can also generate entry signals against the trend, which in a market with a strong bullish or bearish trend can be dangerous.
Most of the indicators in this category are oscillators, which means that they are traced within a predefined range. The oscillator oscillates between overbought and oversold areas based on specific established levels for each oscillator.
Traditionally, it is estimated that the price of an asset is overbought when the RSI is above 70 and oversold when it is below 30.
It should be noted that although they have predictive qualities, these indicators should not be taken as crystal balls to see the future, since they produce enough false signals and their use will normally require the use of others that complement them.
Indicators Late On Price, What They Are And When To Use Them
A price lag indicator is the one that follows the price action and therefore has less predictive qualities. The best known indicators of this type are:
- Bollinger bands;
- Moving averages.
The usefulness of these indicators is usually reduced in periods when the market moves in range without a defined trend, however in markets with a clear upward or downward trend, they can be quite useful.
Indicators that are lagging behind price tend to focus more on the trend and thus produce fewer buy/sell signals. This allows the trader to acquire a greater percentage of the movement of a trend rather than being forced to leave his positions based on the volatile nature of the indicators anticipated.
How are Indicators Used?
The two main ways in which indicators are used to generate buy and sell signals are through crossings and divergences.
- Crossings occur when the indicator moves through an important level or a moving average of the indicator itself. These crossings indicate that the trend of the indicator is changing, which in turn indicates that a movement in the price of the analyzed instrument is about to occur. For example, if the RSI crosses the level 70 from top to bottom, this is a sign that the price of the asset is moving away from the overbought zone, which occurs when the price starts to fall on the market.
- The second way in which indicators are used is through divergences, which occur when the direction of the price trend is different from the direction of the indicator’s trend. This indicates that the price trend may weaken as the underlying momentum begins to change. There are two types of divergence: positive and negative. Positive divergence occurs when the indicator rises as the price of the asset moves down. This bullish signal suggests that the underlying momentum is beginning to change and that traders will soon see this change manifest itself in the change in the price of the instrument. Conversely, the negative divergence generates a bearish signal indicating that the underlying momentum is weakening during a bullish trend.
To understand the concept we will use the following example:
Let’s suppose that the RSI is rising while the price of the asset is falling. This negative divergence can be used to suggest that, although the price is lagging behind the underlying force that manifests itself in the market, as demonstrated by the RSI, traders can expect buyers to take over and maintain control of the market, thus anticipating a possible rise.
What Is Useful And What To Avoid About Indicators
The indicators used in the technical analysis provide a very useful source of additional information. These indicators help to identify the momentum, volatility and trend along with other aspects related to the price of an asset in the market, which is why they help the trader in making decisions.
It is important to note that while some traders use a single indicator for buy and sell signals, these tools are actually useful for the trader when it comes to making decisions, when used in combination with other indicators, price movements and charting patterns.
An experienced trader will normally perform his analysis taking into account the price action and will be supported by some indicators, but will not base his operations exclusively on these indicators.
If you decide to use indicators that anticipate the price movement, it is important to accompany them with some other indicator and especially to base your operations on the price action, letting the indicators become a simple complement to your analysis.
It is essential to be always careful to the operations against the tendency, in how much it is always more probable that the trend follows its course, in how much a tendency does not end until it does not begin another one in clamorous way. It is necessary to keep well in mind that the fact that an indicator is in zone of overbought or ipervenduto does not necessarily mean that the price must change direction in fact, if the excess of an indicator comes maintained for a considerable time in these zones, it is assumed that the indicator confirms the prevailing tendency.