Why You Should Examine Lagging Indicators

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When we take a look at investing from a macro level, such as Foreign Exchange (Forex) trading, we must take note of the presence of lagging indicators.

A lagging indicator is defined as an economic metric that only becomes apparent after the economy has followed a particular course. As a result of this nature, lagging indicators are able to provide a glimpse into long-term economic trends, but are limited in providing predictions about the future.

Examples of lagging indicators include unemployment and interest rates, as both of these metrics are the result of changes in the economy over time. Now that we’ve defined a lagging indicator, we can consider applying them in our investment strategy.

A moving average crossover is a lagging indicator that can be applied in a technical analysis. A crossover refers to the point where the price of the security and its associated indicator intersect. If we add a moving average element to the crossover, we obtain the ability to determine a change in the price trend over a set time period, say 10 years for example. 

Another type of crossover is a stochastic crossover, which tells us the “momentum” of an underlying financial instrument, and shares details on if the instrument was overbought or oversold.

When both of these are put to use in tandem, they can yield valuable information on long-term economic trends.

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