If you use them to trade on ‘only one time frame’ yes but if you use them on a lower time frame to trade a ‘higher time frame’ it’s very debatable. You can also debate a pilot’s instruments lag as well ‘without’ taking into consideration the big picture. For example, an altimeter is useless when you don’t know your location in flight if you are flying over a mountain range as you plan to land at sea level so by the time you see the mountain the altimeter is lagging without the proper information and therefor useless but with the addition of an approach topography prior to landing the altimeter does not lag anymore as it now helps navigate safely.

Weekly:
Lets say you want to trade the 5 MA or even the recent Stoch cycle down using only the weekly chart as in this example. As you know you’d probably end up getting in 100’s of pips late. The big picture shows that after the rally price is likely to retrace at some point. Regardless of buying or selling long term signals we need timing instruments to get into a trade a little better.

4 Hour:
Here on the 4 hr the 55 MA gives us the same view as the weekly 5 MA does. When the candles are far away from the 55 (and weekly 5) it would be highly unlikely that price would just reverse trend and run thru the 55 MA but we can trade plan our way into a reversal regardless. With the weekly Stoch OB and likely to cycle down at some point the MA’s and MACD on the lower time frame allow us to read into a move for better timing. First watch for candles to break thru the 55 (in white circle) as an early indication or a ‘leading’ factor that price might reverse. Once that happens we can turn to the Stoch and 5 MA here on the 4 hr to start ‘timing’ the larger degree weekly move by trade planning to sell. The 21-55 MACD will weaken and eventually fall below the ‘0’ line giving a confirmation for the higher time frame ‘And’ realize these candles update 6 times/day all week ‘Before’ the weekly chart updates on Friday after the market close. The same thing will happen in reverse of course for the bulls, example below.

15 Min (1):
Now do the ‘Exact’ same methodology on the 15 min to time the entries for the 4 hr 5 MA. So the 55 here is the 5 MA for the 4 hr so as the Stoch cycles are OB trade plan to sell those rallies. When the 15 min 21-55 weakens and crosses the ‘0’ line it’s a leading indication once again for price on the higher time frame. So if the 4 HR is being used to trade the weekly and the 15 min is used to trade the 4 HR you are aligning 3 time frames of momentum and using the MA’s and MACD ‘leading’ the way to trade the higher degree time frame. If either of these go against your trade plan on the 15 min then exit & trust the indicators and ‘wait’ for another entry, it will come just be patient!! To further ‘lead’ into a trade you can trade the 15 min 5 MA and Stoch cycles by simply repeating exactly the same methodology on the 1 min chart !! You can think of you entries on the 1 min chart as day trades and the entries on the 15 min chart as swing trades.

15 Min (2):
This chart I am using to show a reversal the frustration that comes when trading that reversal. The long entries are counter trend (blue circles) as bulls look to buy off the 38.2 long term fib zone. This is where patience and diligence comes into trading a plan and following your signals to stay in or get out and wait!!

Now add other ‘leading indicators’ into your plans as well such as S&R and Pivots for example. This is a lot to chew on and when trading long term signals ‘Do Not” ignore the ‘Time’ factor. It is probably the most important and least discussed hurdle in trading since we trade the ‘Right’ side of a chart, NOT the left side. Using alarms on your indicators helps with the time factor especially if you have them texted to you from MT4!

What do you think, are MA’s and MACD leading or lagging?

Note: Keep in mind that ‘ALL’ indicators do just ‘One’ thing, they measure ‘Rate of Change.’ How do you use your favorite indicators?

Hope you enjoy.

Weekly

4 Hour

15 Min (1)

15 Min (2)

7 thoughts on “Moving Avg’s & MACD. Leading or Lagging?”

  1. Ken Moulton says:

    Hi James

    Good subject!

    The altimeters onboard most planes are actually aneroid barometers (pressure-measuring instruments) that have been calibrated (marked with a scale) so they show height instead of pressure. Like normal aneroid barometers, they consist of a hollow, sealed box that expands (as the pressure falls) or contracts (as the pressure rises). As the box changes size, by very tiny amounts, an intricate system of levers and gears magnifies its movements and makes a pointer rotate on a dial marked with height measurements. Hey presto, tiny changes in air pressure become accurate measurements of altitude.

    This is a cut and paste but it explains this topic very well.

    The pilots altimeters don’t actually lag, only a pressure change can move the dial and more importantly a pilot needs to know the height of the terrain by reading their navigational charts. Just like a moving average of 5 ema on a M1 chart over a period of time with a very tight range the average will just drift into the middle of the range and go flat. Like the altimeter the price has to move out of the range to change the calculation of the average and thus move the ma.

    This may seem as though I am oversimplifying the topic but I think you are spot on with the desire to fully understand how your indicators work and what they are actually telling you.

    The ma, stoch, macd, pivots all depend in most part on a mathematical calculation of price movement therefore they are lagging.

    I would say the more important things are when and what attract traders i.e. volume into the market.

    Time of day- Session opens and closes, overlaps of sessions.

    Obvious levels where price was rejected before.

    Areas where there are likely clusters of stops from previous peaks.

    We could also discuss the way large orders have to be set up so the positions can get in without moving price to much.

    I like averages and use them like the lines on the road but I lean heavily on support and resistance, fibonacci, psych numbers and the speed at which price approaches a level (vector)-a quantity having direction as well as magnitude. The good old rubber band effect.

    Thanks for your post this is a great discussion and I hope to hear from more of our fellow traders.

    Cheers

    1. James Mauro says:

      Hey Ken, the altimeter analogy was purely that for a visual of trying to land after a rally like U/J had but showing how to do it safely. Sounds like you have flying experience, very cool. Did you try to land or waiting to take off recently?

      Yes the key point is ‘Understanding’ how to read indicators on the lower time frames while planning on a larger degree time frame therefor using them to ‘Lead’ the way into a trade ‘Without Ignoring Time’ since that’s exactly what looking at the larger degree presents to us.

      I only used a fib zone and mentioned S&R and Pivots as other leading indicators but didn’t want to muddy the waters with other topics but I like the vector aspect you mentioned and see that in the charts at times also but definitely an advanced topic.

      I also thought about showing this point with other indicators but thought it better for others to do it on their own with their favorite indicators so maybe someone will post how they use RSI, BB’s, Williams, Ichimoku, ADX, etc… Would be interesting i think for a comparison on rate of change using different indicators.

      Thanks for chiming in, 1 out of 78 hits, Yeah! LOL.

  2. Ken Moulton says:

    Hi All

    As a followup I would like to raise the question of “Why does money flow into the market”

    If you have 100M to exchange then how do you do that? Where and at what price would you do the trade? Would it be because some indicator told you to?

    I would suggest the the smart money of the world follows a different set of rules than retail traders.
    I would suggest the the smart money of the world has advanced information of the news.
    I would suggest that following the trail that they leave is the most profitable.

    So what does the trail look like?

    When do they come to the market?
    Where do they put their money to work?

    We have all seen price move in trending ways and in very violent ways, why is that? Random?
    I have watched the charts long enough to believe that it is NOT random!
    Tapping into the time of business and the method of business, I believe is at least one leading indicator.

    We can debate the method. I don’t think we can debate the time. People around the world come to work at around the same time on any given day.

    Large institutions can hold price for as long as they want by buying and selling to each other. I sell to you, you sell to me…..

    I would also like to raise the question of consolidation. What is that?
    It is when the large institutions balance their book.

    Why does price move so violently and then stop and range for hours?

    Would any indicator tell a person the inner workings of large institutions?

    Food for thought. I hope to hear others opinions on this.

    Cheers

  3. Maryna says:

    Hey James/Ken

    Great topic and insight even though I use no indicators, except for the stochastic (at times).All indicators are lagging and why I don’t use them to trade. As a technical/price action trader I only find them a nuisance on charts.

    Ken, you are on point about trading the “open/close/overlapping” sessions and that is something few mentors/coaches teach traders and only mention it as a “by the by”. I make the majority of my income from specifically trading the open/close/overlapping of sessions, however, there is a unique strategy to be used when trading it, due to “timing”/volatility. Don’t forget the market close at the end of a week (Friday evenings) often pay big pips as well. Will be great to hear how other traders in the group trade these specific “times”.

    Consolidation – I don’t think there is just one reason for consolidation but a few. What I’ve noticed is the market tends to consolidate after MAJOR support/resistances have been hit and will normally test it more than once and then the market moves with big pips when it breaks consolidation. Major S&R levels on Monthly/Weekly/Daily charts.
    Consolidation must be a trend trader’s worst nightmare as the market fails to make HH/HL and LH/LL.
    Major political/economic events (and I mean MAJOR) also cause consolidation.
    To a lesser extent, I’ve seen Bank/Public Holiday’s making markets consolidate.
    Ken, you have a great point as well by asking if it may be due to banks balancing their books – no idea, but I will ask my bank and see if they are prepared to answer me.

    How to trade consolidations is the next question and my answer will be to trade Larger time-frames e.g. Weekly/Daily or even Monthly until it breaks consolidation.

    Now, I have a question for Pivot traders (and I’m not a Pivot trader). What do you do when a Pivot is missed? I often hear Pivot traders ignoring it or saying they then use S&R levels or go to higher time-frames, but Pivots are S&R levels from what I’ve heard. I can’t image that big institutions will ignore a missed Pivot (if they use Pivots as so many traders say). So what do Pivot traders do about Missed Pivots and especially Monthly/Weekly/Daily pivots? Sure, a STOP-LOSS will prevent Loss, but what about the PIVOT and by the time you notice or get confirmation that a Pivot has been missed, you may already be in a significant loss (Large investors surely don’t use a 20-50p SL as retail traders do) I would like to hear the views of Pivot traders in this group.

    Happy trading!
    Maryna

  4. Ken Moulton says:

    Please understand, I welcome all opinions.
    Consolidation is where the institutions buy and sell to each other for the purpose of filling the orders they have from their clients. They hold price there because that is the price they promised to the client.

    We should not try to trade consolidation because price is not going to move significantly.
    If you want to scalp a few pips then have at it, good times.

    I feel that price action and price level is the final answer to the puzzle.

    I Ask again, why does money flow into the market? Riddle me this Batman?

    Daily Pivots seem nice but opposed to popular opinion they are lagging. Please only use weekly or longer pivots.

    News- News is for the institutions to move price to the spot they wanted it to move it to anyway.
    Pick your spot and enter the reversal or take the fib and your chances.

    As I posted before, the psych levels seem to be the best source of support and resistance. With that said may I address what a colleague said. “What do we do when a pivot is missed?”

    Price dose not stop for an indicator. I suggest that you use your trading entry technique to filter your trades. I have my own but I suppose you all do as well.

    ADR- pick pairs that offer the appropriate volatility for your style.

    With all of this said, I am enjoying the friendship and debate.

    I now ask you fellow traders, can we consolidate our opinions into actionable intelligence of which everyone can take advantage. If so HOW?

    We all post long term plans but what about today, this session, while my butt is in the seat?

    Happy trading to all, Cheers. And may the pips be with you!

  5. Maryna says:

    Hey James/Ken! Is this for real? James’s post received more than 150 views since Friday and only 2 Likes and only the 3 of us discussing/giving feedback?? Same with other posts – lots of views and zero “likes”? Maybe we need a dislike button as a “no like=dislike”! It’s not about “liking” a post that matters, but participation and seemingly too much of an effort. Time to start our own trading group, I’d say!

    Happy trading!

  6. James Mauro says:

    A thought on consolidation and trends. Note, I had specifically mentioned that we trade the ‘right side’ of the chart and not the left for a reason for discussing the topic of indicators being leading or lagging when used to trade ‘higher time frames’. Since we can’t see into the future it is imperative to trade with a bias/plan to either buy or sell ! Markets are far from ‘Ideal’ and therefor make any analysis challenging. Planning & discipline without an ego is what will give you best chances for success.

    Examine the 15 min (1) chart above as I have it designed for a reversal based on a higher time frames 38.2 fib. The bears would be trading it down to the 38.2 and the bulls would be cautiously buying that zone. Notice the consolidation before the upside breakout where the bulls start trade planning getting 3 chances using the MACD instrument/indicator to navigate into the trend (15 min [2] specifically) while also using it as an exit signal to wait for the next opportunity should it come at all off that zone. Even if you used only the MA’s as candles crossed over similar to a trendline you’d could catch the trend. Both are examples of trading a plan and how so called lagging indicators become leading if you understand how to read an ‘instruments math’ just like a pilot does to use the analogy mentioned. If the bulls waited to get in on the break of the most recent resistance, black dotted line, the risk exposure increases to at least 150 pips as one tries to get in on the reversal. You could of course catch the retracement ‘should’ it come at all and you’re at the charts ‘when’ it does. Again more uses for alarms !

    I see posts that trade zones on higher time frames that would have a trade open for months at a clip sometimes as hope settles in that the plan is right while riding out a consolidation period. I have personally let trades run to 2-3 months and I’ll say this, you better be getting ‘Paid’ interest on the swap and not be paying it since I have experienced 30% profits or more taken from a trade to the broker and if you don’t get out at the top/bottom then you’ll give pips back as well yielding a mediocre trade at best that you could’ve traded better shorter term! Of course sometimes it works out great if you catch a trend early as money flows in but even then how do we know a trend will actually last a week or a month?

    I’ll ask another question, do markets trend more than consolidate and how do you know when either will occur on the right side of the chart??

    Trading a bias, sticking to that bias, planning on longer term, and timing trades on the shorter term will catch the money flow and you’ll eventually find out if you’re bias is valid or not but risk management keeps you in this game.

    Thanks for the thoughtful responses Ken & Maryna., horrible batting avg indeed as this post was designed to spark reader involvement. LoL…

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