Lagging Indicator vs. Leading Indicator – Which One Should You Follow?

Lagging Indicator versus Leading IndicatorIndicators are very important to be successful in businesses involving stock and shares and foreign exchange. To make this easy there are quite a number of Key Performance Indicators (KPIs) designed for traders to use in predicting changes. These indicators also include two common indicator categories called “Lagging” and “Leading” indicators.

Definitions:

  • The Lagging Indicators: These are indicators that give a signal after the financial or economic trend changes.
  • The Leading Indicators: These are indicators that give a signal before an economic or financial trend changes.

Uses of Lagging Indicator

The lagging indicator is a key tool that helps in analyzing the developments or changes that have just happened, their results and their effects. It can be used in analyzing things like:

  • Number of users or consumers of particular products and services.
  • Returns collected after the sales of the product and how it preformed in the market.
  • Page impressions of specific products made over a specific time period.
  • Costs of materials and maintenance or other expenses made for a business.
  • Revenues involved in a business venture.
  • Plans to recover from the effects of the changes that have happened.

Uses of Leading Indicator

The leading indicator is a key tool that helps in analyzing the developments of the future before they happen. It also analyzes causes of these predicted changes and provides an understanding of the likely outcomes before they happen. It can be used in analyzing things like:

  • Plan before the changes take place to reduce if not avoid the losses as much as possible.
  • The budget for the next year.
  • Booked impressions for the coming quarter in a firm.
  • Number of leads that will be required and forwarded to affiliate businesses for a certain product over a particular period of time.
  • Page impression that will be needed for a particular contract.

Comparing Lagging and Leading

From the above uses and definitions, the leading indicator has better potential when it comes to sensitive profit and loss decision making. This is because firms need good insight into what to expect in the near future. A leading indicator informs the users who may be managers and finance directors on what likely losses they may face. This information can then be used to start planning and looking for means of avoiding these losses.

However in lagging indicators, the changes in the economic and financial trends are indicated after they have happened and this leaves no choice for users to save themselves from losses. However, it does work for some businesses which are not highly dependant on economic changes. It also is good when the business needs to know about how well it has performed.

Advantages of the Lagging Indicators

  • In IT departments, lagging indicators are the quickest way to produce and deliver the scores of the leading team.
  • Data related to lagging indicators are easiest to find in the database.
  • You don’t need an insight into a business to understand the data and progress.
  • Achieve high percentages of winnings in trades you make.
  • There will minimum chances of mistakes.
  • Buying and selling stops can be predicted in good time, reducing chances of losses.
  • Keeps users updated before time.
  • It is very good when it comes to FOREX. In FOREX a leading indicator is recommended.

Advantages of Leading Indicators

To conclude it can be said that to make the most gains in businesses one needs to consider other factors as well, like market type, frequency of the trade, speed of the market and the trader’s personality. Based on this, one needs to draw out a plan to invest, plan to trade and the time limit the trader can work with.

Recommended Links

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For further details on how to play the stock markets, and advice on the best investment newsletters that are on the market today, we also recommend the Hulbert Financial Digest from MarketWatch (part of the Dow Jones Company).