Lagging indicator and Leading indicators. There are basically two types of indicators.
Lagging indicators informs you about the long-term plan of the price movement of a particular currency. However it does not predict it. It reflects a change in an economy. It is a measurable indicator which changes with the change in the price of a certain currency.It has proven useful as signals to effectively trade in financial markets as it also reflects the past performance of a currency as well. These Indicators do well in trending markets. Lagging indicators include:
- Interest rates
- Corporate profits
- Gross Domestic Products
- Unemployment rates
- Consumer Price Index etc.
Lagging indicators also have a major drawback as well. Sometimes when it informs you, it is too late to enter into a trade. However still it keeps you away from risk and on safe side.
Leading indicators are also referred to as forward looking indicators. This type of indicators informs you about an upcoming new trend in the price of a currency.Similarly it gives you a signal to be prepared for a reversal in the price that is going to happen. Thus it keeps a close watch and predicts future movement of the price of a currency. Lagging indicators are not suitable for ranging markets. On the other hand, leading indicators do well in ranging markets.Leading indicators include Retail sales, customer satisfaction, brand recognition etc.
Sometimes these are volatile and in case of short-term changes in the price of a currency may result in giving false or misleading signals.