They may not foretell the future like a magic crystal ball, but leading indicators sure can be a helpful guide. They can help you foresee likely tops and bottoms well before you reach those levels.
Later in this book, I will show you how you can use these leading indicators to either enter a trade or exit a trade by creating a trade plan with these levels in mind. Do these future levels, potential tops and bottoms, always work as predicted? No. That is why we use lagging indicators as well. Together, lagging and leading indicators paint a more complete picture.
In any case, both lagging and leading indicators are simply mathematical studies of price action. This is called “Technical Analysis.” They explain what has happened and perhaps where price is likely to go as a result. However, they do not explain why price is behaving the way it is.
Fundamental Analysis is the study of economic data. This information is what moves the currency market: It shapes trader bias. It is what makes people bearish on the British pound, bullish on the Japanese yen or such. Bias, or the net sum of the opinion of all traders, is why currency values change.
It would be a strategic advantage to understand how traders will likely respond as the market changes over time. Smart traders understand that they do not impact the market as individuals, therefore they do not trade as individuals. They study the market to identify “herd mentality” and join the crowd. This strategic analysis is the ...