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Lagging Indicators

A lagging indicator gives a signal after the trend has started.

Lagging indicators will spot trends once they have been established, at the expense of delayed entry. The bright side is that there’s less chance of being wrong.

Some examples of lagging indicators are:

  • Moving averages
  • MACD

If you put a 8 EMA (Exponential Moving Average) and a 50 EMA on your chart, you could enter bullish when the 8 EMA crosses above the 50 EMA. To see the long term trend, you could put a 200 EMA on your chart.

Moving Averages Cross Entry Signal

To trade using the macd, enter bullish when the histogram rises above the signal line and exit when the histogram falls below the signal line.  Enter bearish when the histogram falls below the signal line and exit when the histogram rises abovethe signal line.

Example of a MACD bullish entry

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MACD - Moving Average Convergence DivergenceMACD is an acronym for Moving Average Convergence Divergence.   This tool is used to identify moving averages that are indicating a new trend, whether it’s bullish or bearish.

With an MACD chart, you see two numbers that are used for its settings. The default values are 12, 26, and 9.

  • The first, 12,  is the number of periods that is used to calculate the faster moving average.
  • The second, 26, is the number of periods that are used in the slower moving average.
  • And the third, 9,  is the number of bars that is used to calculate the moving average of the difference between the faster and slower moving averages.

There is a common misconception when it comes to the lines of the MACD.  The two lines that are drawn are NOT moving averages of the price.  Instead, they are the moving averages of the DIFFERENCE between two moving averages.

The histogram shows the faster moving average, and the signal line shows the slower moving average.

When the histogram is above the signal line, that is a bullish signal. When the histogram is below the signal line, that is a bearish signal.

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A moving average is simply a way to smooth out price action over time.  By “moving average”, we mean that you are taking the average closing price of a currency for the last ‘X’ number of periods.
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Do you want to know when to expect a trend reversal? Crowns are one way to spot a trend reversal. Another way is to spot divergance. You need an oscillator to help you spot divergence. You can use an indicator like MACD, RSI, Stochastic, or CCI. I will show you how to use MACD.
 
Add the MACD indicator to your chart. When you see the trend going one direction, and the macd going another you have divergence.
MACD Divergence

MACD Divergence

The candles are in a downtrend, but the MACD is making higher lows. This means there is divergance and there is a good chance the candles will be going bullish soon.

MACD Divergence

MACD Divergence

Voila, the candles have turned!

To summarize, we have divergence:

  • If the price is making lower lows,
    but the oscillator is making higher lows.
  • If the price is making higher highs,
    but the oscillator is making lower highs.
  • If the price is making higher lows,
    but the oscillator is making lower lows.
  • If the price is making lower highs,
    but the oscillator is making higher highs.

Do not use the divergence on time frames smaller than the 1 hour. The longer the line of divergance the stronger the indicator. The larger the time frame showing the divergence, the stronger the indicator.

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