What is a Lagging Indicator?
A lagging technical indicator relies solely on past data. For example, a traditional 6-day moving average of closing prices takes the past six days of closing prices, adds them up, and then divides by six. All of the data used to calculate the moving average is actual and has already happened. Thus, the predictive value of such an indicator is minimal, based solely on past data.
6-day Moving Average (MA) = 6 Days Actual Data / 6
A traditional 6-day moving average (MA) of closing prices takes the past six days of closing prices, adds them up, and then divides by six.
Admittedly, traders like moving averages because they smooth out the peaks and valleys in prices, are easy to use and are easy to interpret. These are their positive qualities. The lag effect, though, has always been the Achilles’ heel of moving averages. In 1991, after years of research, Louis Mendelsohn introduced VantagePoint which relies on cutting-edge technologies involving the application of neural network pattern recognition to intermarket analysis. Through this process, VantagePoint actually forecast trends and changes in trend direction with incredible accuracy. Its “predictive” moving averages spurred a revolution in technical analysis by completely eliminating their lag effect.