Leading Technical and Economic Indicators
What are Leading Indicators?
Leading Indicators provide buy and sell signals based on the concept that a security is oversold or overbought. These leading indicators attempt to make investment calls on securities prior to actual price confirmation. Leading indicators provide greater reward than lagging indicators, due to the fact the majority of profits in trading are made at the beginning of a move. These indicators are often the tools of choice for active traders that have short investment horizons and are looking to capture profits from small moves. The challenge with using these indicators is that you will have to make sure you are trading in sideways markets. Since the signals attempt to lead price action, if you are trading in trending markets, you will find yourself caught in a number of false signals, as bearish markets will become more bearish. However, the benefit of utilizing these indicators is that you can get in and out of trades more frequently, thus adding to your bottom line. There are two types of leading indicators: (1) economic and (2) technical.
Economic Leading Indicators
Economic leading indicators measure the health of the economy and are used to predict future economic trends. Examples of economic leading indicators are bond yields, consumer price index, corporate profits, and labor costs.
Technical Leading Indicators
Technical leading indicators measure the price movement over a set number of periods. Examples of technical leading indicators are the commodity channel index, relative strength index, and slow stochastics.