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Tuesday, June 25, 2013

Leading, lagging and coincident indicators

Economic conditions are reflected by coincident indicators
Technical indicators provide buy and sell signals to currency traders

By Mario Singh

Forex traders use indicators extensively in making their trading strategies. But what are indicators? It is anything that is employed to help in anticipating an economic or financial trend. We see indicators almost every day. A good example of indicators is the economic statistics and figures that are released by government bodies to show a country’s performance. Among the most popular indicators are the unemployment rate, inflation index, and consumer confidence.
There are three types of indicators that are differentiated by the type of predictions they produce.

Leading indicators

Leading indicators are the type that is related to future events. The indicators will give signals as to what the sentiment will be. One of the most popular leading indicators is bond yields, which is a great match for those trading stocks. The reason for this is that bond traders always anticipate and try to guess economic trends. Of course, leading indicators are not always 100 percent accurate so use it with a little caution.

Lagging indicators

This type of indicator is gives a signal after an event has started and after the trend has begun. This indicator can be considered as a kind of wake-up call for the trader to pay attention because a trend is happening and he should probably get in on it. You might think that a lagging indicator is useless because the signal happens after a trend has already started. But it is an important indicator because it is used to confirm that a pattern is beginning to happen or is about to happen. One of the most popular lagging indicators is the unemployment rate. A high rate confirms that the economy is not doing well.

Coincident indicators

A coincident indicator happens at about the same time as the conditions are re-indicating. Instead of predicting future events, these indicators would change to reflect what is happening in the economy or in the forex market. A good example of a coincident indicator is personal income – a high personal income happens alongside a robust economy.
It must be noted that these indicators, while potentially supportive of what they indicate, would more often conflict with each other. This is a pitfall of using indicators in doing your trade strategy. You should always remember this when using indicators and make the necessary adjustments to make your trade strategy relevant and accurate.

How indicators affect the forex

The exchange rate of a currency is partly affected by the demand for that currency. How the leading and lagging indicators of an economy behave affects the strategy and decisions of forex traders. For example, if the indicators are showing that a country’s economy is moving very positively and is poised for an expansion, forex traders will buy more of that country’s currency. Because the demand for the currency begins to rise, this will result in the value of the currency to also appreciate, which takes on the form of a higher exchange rate relative to the currencies of other countries in the forex market.

About the author: Mario Singh is a renowned figure in the forex trading world. He is the owner of the popular forex strategies website Askmariosingh.com.

Image license: RGBstock; Credit: Lusi