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Learn Forex Trading > Day 7 Class  ( Oscillators & Momentum Indicators ) > Momentum / Lagging Indicators
Momentum / Lagging Indicators
The Momentum indicator is a speed of movement (or rate of change) indicator, that is designed to identify the speed (or strength) of a price movement. Usually, the momentum indicator compares the most recent closing price to a previous closing price, but it can also be used on other indicators such as moving averages. The momentum indicator is usually displayed as a single line, on its own chart, separate from the price bars, and is the bottom section in the example chart.

Trading Use

The momentum indicator identifies when the price is moving upwards or downwards, and also by how much the price is moving upwards or downwards. When the momentum indicator is above 0 (zero), the price has upwards momentum, and when the momentum indicator is below 0 (zero) the price has downwards momentum. The momentum indicator can be used on its own, or as part of a larger trading system.

One of the most essential information that a forex online trader has master is actually spotting for a trend in forex rates. Remember that the basic way on how a foreign exchange trader would actually gain profit is by buying and selling the right currency at the right time. Simply put, a foreign exchange trader would actually buy a certain currency while its price is still relatively cheap. Then, when it comes to a point where the relative price of that certain currency is already expensive enough, traders are going to sell again that currency. In this case, it is important for you to know the trends, on when would foreign exchange rates would likely increase or decrease. That is where lagging indicators come into importance.

Basically, lagging indicators will tell you whether a new trend will actually take place. In this case, it waits for a trend to be already established before it indicates that you can already buy or sell your currency. This is the reason why it is also called momentum indicators. However, the fact is that it waits for some time before it can signal you to trade your currency. In other words, it actually has a time lag. Despite this fact, many foreign exchange traders still choose to use lagging indicators. This is because, it actually poses fewer risks as com pared to leading indicators. Momentum indicators may make you miss out the most profitable chances of trading your currency. However, using momentum indicators would help you lessen the risks of trading your currency at the wrong time. This also means lowering chances of losses, which proves very valuable to low risk traders in real trading online.

One of the most common momentum indicators are the MACD and the moving averages. It is true that these indicators will spot trend very accurately. However, delayed entry is paid in exchange. These indicators actually make signals you to sell your currency when there is an upward trend of currency prices, because this situation is very profitable relative to your position. Likewise, it will signal you to sell your currency when there is an already established downward trend of foreign exchange rates. In this case, it actually helps you to trade you currency at the right time. Using these tools effectively makes you more profitable when trading forex. It is a good thing that there are many forex trading automated software, also known as forex “robots,” that you can utilize. This software actually computes automatically these momentum indicators for you.

However, it is still a wise thing for many people who engage in trading online to be an expert of the fundamentals of the foreign exchange market. This is for you to make guided decisions when trading forex. Remember that automated software also make mistakes, which is why having solid fundamentals is always a plus.

Lagging Indicator

A lagging indicator is an economic indicator or indicator in finance that summarizes past events rather than explicitly predicting futures ones.

For example, in a performance measuring system, profit earned by a business is a lagging indicator as it reflects a historical performance; similarly, improved customer satisfaction is the result of initiatives taken in the past.

In finance, Bollinger Bands are one of various lagging indicators in frequent use.

In economics

The Index of Lagging Indicators is published monthly by The Conference Board, a non-governmental organization, which determines the value of the index from seven economic variables. These components tend to follow changes in the overall economy.

The components are:

1. The average duration of unemployment (inverted)

2. The value of outstanding commercial and industrial loans

3. The change in the Consumer Price Index for services

4. The change in labor cost per unit of output

5. The ratio of manufacturing and trade inventories to sales

6. The ratio of consumer credit outstanding to personal income

7. The average prime rate charged by banks

Economists' use the Index of Lagging Indicators to validate assessments of current economic conditions.


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