What are Leading, Lagging & Coincident Indicators?

We always hear about how indicators can help us in trading. However, knowing how to use indicators but not understanding their basics will not get you anywhere. The following are some useful information which will help you in your trading journey.    

Leading Indicator

Leading indicators are information that will predict future price movement in the market. Think of how Waze and Google Maps help you determine the estimated time of arrival to your destination. The estimated time is a leading indicator. It tells the time of arrival while you are still at your starting point. 

In the stock market, bond yields and futures index are considered as leading indicators. Bond prices move first and the stock market index will usually follow. Futures index are used to predict future market trend.

Dow Jones 30 Futures

This is traded throughout the day before the US Markets open at night (Singapore time). If an event occurs before the market opens that causes the Dow Futures to plummet, it is a fairly good chance that stocks will fall once the opening bell rings.  

Lagging Indicator

When you start your journey, Waze will display the routes to your destination. Think of the routes as your lagging indicator. You will use this indicator to ensure that you do not make any wrong turn during the journey.

The most commonly used lagging indicator is the Moving Average. Trend followers use the Moving Average to determine if the trend is changing or stays the same. In most occasions, price movements are random due to market noises. The trend will resume when the market noises settle down. Moving Average eliminates the noises and keeps you on the right path.    

Straits Times Index (STI)

The following is a chart of the Straits Times Index (STI) with 3 moving average lines (5, 10 and 15 days Moving Average). The crossing of the moving averages indicates a change in trend. These are the turning points where we can buy or sell our shares.  

Coincident Indicator

When you are driving, there are things which Waze cannot predict. Examples include a sudden heavy downpour, an accident that causes traffic slowdown etc. These are what we call coincident indicators.

If we were to apply this to the markets, some unexpected events such as the failure of the Doha Oil Meeting will be considered as coincident indicator. This type of indicator will usually change the direction of the trend and heavily impact the market.

With the indicators, you are able to:      

  • Spot the change in trend
  • Determine the market levels (oversold or overbought)
  • Identify the buy and sell points

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