We’ve already provided one example of each type of indicator. Relative Strength Index (RSI) is a leading indicator as it hints at whether the market is becoming overbought or oversold.
Moving Averages, in contrast, rely on historic data and provide a continually updating retrospective view of average price behaviour.
On Balance Volume
We introduced On Balance Volume in a previous article looking at volume in general. By indexing volume changes OBV can provide a potential indication of price direction, given price and volume are so closely linked.
Bollinger Bands
Taking their name from their creator, John Bollinger, Bollinger Bands are a measure of volatility and can be useful as both a leading and lagging indicator.
Bollinger Bands are plotted as three lines. The middle line is just a Simple Moving Average (we discussed Moving Averages previously) usually at 20 days/weeks. The top and bottom lines are two standard deviations above and below the Moving Average.
So Bollinger Bands essentially plot the extremes of potential volatility. When the bands are close together, markets are stable, the trick is to know the signs that volatility is coming, and obviously in which direction.
As volatility increases, the bands will expand as the potential range of change increases. Conversely, when Bollinger Bands are far apart, it’s important to try and pre-empt them squeezing back closer together as volatility declines.
Because of their use of a Moving Average and standard deviation, Bollinger Bands are often described as mean reversion indicators.
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