Lagging Indicators In Stock Market: Technical analysis is based on the premise that past prices can help you forecast the future prices of the security. These future price movements can be done in many ways, one of which includes technical indicators.
Technical indicators are tools that use mathematical tools, graphs, price data, and charts that help traders analyze the trends in the market. These indicators are divided into leading and lagging indicators. In this article, we will be discussing the lagging indicators in stock market.
What Is A Lagging Indicator?
Lagging indicators are indicators designed to follow an event or trend in the market. This indicator can help individuals spot trends or reversals in the market.
These indicators are called lagging indicators as they give a signal of trends or reversals after they have occurred in the market. They mainly help individuals in confirming the trend and help them place appropriate trades.
Though the lagging indicators help you identify the trends in the market, they often give the signal late due to which individuals will need more time to capture many profits in the market. This is because the markets make huge movements during the initial stages of the trend.
Despite the late signals, many individuals prefer to use lagging indicators as it helps them gain more confidence in the trend existing in the market. Here are some of the popular lagging indicators in stock market.
1. Moving Averages
Moving averages is one of the most commonly used lagging indicators in stock market. It is considered a lagging indicator because it is based on the historical data of the securities.
It is a line that indicates the average true value of the security’s price that is plotted using the closing price.
The MA can be plotted using different day averages like 10 days, 20 days, 50 days, 200 days, and so on. But the indicator will have a greater lag as the size of the timeframe to plot the average increases.
This indicator is used by individuals to spot a buy and a sell signal. When the price of the securities moves above the moving average line, it is considered a signal to buy the security.
When the price of the security moves below the moving average line, it is considered a signal to sell/short the security.
This indicator can also be used to plot support and resistance levels. When the price of the security comes closer to the line of the moving average, it tends to bounce back from those levels.
If the price is trading below the line of MA, it acts as a resistance level and when the price trades above the moving average, it acts as a support level.
The moving averages are broken down into various categories of which simple moving averages (SMA) and exponential moving averages (EMA) are commonly used.
2. Bollinger Band
The Bollinger Band is an indicator based on a 20-day simple moving average (SMA) and two outer lines that are standard deviations plotted away from the SMA.
The outlet standard deviation lines are used to measure the volatility in the market and these expand and contract whenever the volatility increases and decreases.
This indicator does not actually tell you when the volatility or the price move will occur. It only gives a signal that a bullish or bearish trend might take place in the market.
Bollinger band is used to determine whether a security is overbought or oversold. When the security is continuously touching the upper band, it is an indication of it being overbought and when it touches the lower band, it is an indication of it being oversold.
Thus the upper band in this indicator acts as a resistance when the price moves towards it and the lower band acts as a support when the price moves towards it.
3. Supertrend Indicator
The supertrend indicator is another lagging indicator in the stock market which is very simple to use. It comes with a default setting with an Average True Range and a multiplier of 3.
The above-mentioned parameters form a line below or above the price of a security.
This indicator turns red when the supertrend line is above the price of the security and the indicator turns green when the supertrend appears below the price of the security.
When the supertrend indicators turn green, it suggests that the bullish trend has started in the market and you can enter a long position at this time.
When the supertrend indicators turn red, it suggests that the bearish trend has started in the market and you can enter a short position at this time.
Supertrend indicators can also be used to plot the support and resistance in the market. When the supertrend indicator is red, it acts as a resistance when the price moves toward that line. When the supertrend indicator is green, it acts as a resistance when the price moves toward that line.
How Are Lagging Indicators Different From Leading Indicators?
1) When compared to leading indicators, the lagging indicators give lessers false signals which reduce the probability of loss-making trades.
2) As the lagging indicators are the result of historical data, they generally provide more accurate signals when compared to leading indicators.
3) Since the lagging indicators provide the signal after the initiation of the trend, they may not capture as many gains as the leading indicator.
4) While the leading indicators are generally used for the purpose of day trading, the lagging indicators are more suitable for the purpose of swing trading.
Also Read: Most Accurate Leading Indicators – Pros, Cons & More!
In Closing
In this article, we discussed what are lagging indicators in stock market and we discussed some of the commonly used indicators namely moving averages, Bollinger bands, and supertrend indicators.
Though the lagging indicators are commonly used by individuals to base their trading decisions, it should not be sole factoring to base your trade.
As stated in the article, these indicators may be accurate every time and thus, should be used with the combination of technical analysis and market news to get more accurate results.
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