How To Use Top Indicators In Trading | A Guide By Tu Analysts
In order to make timely and reasonable decisions, traders need leading indicators for trading. These indicators are required for determining the overbought and oversold zones; they lead the trend. Instruments of technical analysis help determine how the price changes taking into account relevant values and find the best times to enter/exit a position.
Main Pros And Cons Of Leading Indicators
First, let’s understand how leading indicators are used in trading and what for. These technical analysis instruments help:
- confirm movement of the trend;
- find levels and potential zones of trend reversal;
- evaluate the strength of the trend.
This means that leading indicators allow traders to learn important information about the trend. They are used to determine an imminent recession, trend continuation or transition into a sideways movement. As a rule, day traders or traders using short-term strategies are the ones using leading indicators. However, leading indicators may provide false, misleading signals for long-term investing.
The main advantages of leading indicators as cited by investors include:
- clear setting of financial goals and risk management. The leading indicators have an understandable formula and open source code that can be modified into a unique tool. When the indicator leaves the overbought zone, the Take Profit order stops in the opposite zone. At that, the Stop Loss order is on the edge of the overbought zone (rises to the breakeven level);
- warning about the change of the trend. You will be able to see indicative zones and learn about potential trend reversal.
There are also certain disadvantages of using leading indicators in trading:
- the signals are less accurate compared to lagging indicators. For example, if an oscillator hits the oversold/overbought zone, it signals to the trader an inevitable trend reversal. However, you won’t know exactly when this will happen and how long the indicator will remain in this zone;
- redrawing is possible. As a rule, the price of a candle that hasn’t been closed yet is included in the formula of leading indicators. The indicator line will change automatically when the online price changes. This is used in critical scalping strategies.
Additional filters, specifically additional indicators, are used to reduce the disadvantages of leading indicators. Also, you can try searching for a stronger movement on longer time frames.
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What Instruments Can Leading Indicators Be Used With?
There are no limitations here; everything depends on your financial goals, personal preferences and experience. You can find optimal combinations and achieve success. Leading indicators can be combined with the following:
- reversal instruments. These include pivot points and figures (Double Bottom, Hammer, etc.) With a reversal signal, presence of a leading indicator in the overbought/oversold zones will be considerably stronger;
- Support and Resistance (S&R) levels. They also considerably strengthen the signals of oscillators and help make reasoned decisions;
- trend indicators. They signal the beginning of a new trend.
The right usage of leading indicators in trading and combining them with additional filters will greatly improve your chances at achieving success.
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