Traders use leading stock indicators to predict future price moves. Ideally, leading stock indicators send you a signal to enter a trade before a new stock trend develops or an existing trend reverses so you can ride the momentum for maximum profit. But in the real world, leading indicators can you give many false signals. As a result, stock traders use lagging indicators and chart formations to confirm the leading indicator signals before entering or exiting a trade.
Relative Strength Index Leading Indicator
The Relative Strength Index measures a stock’s momentum to determine if it is overbought or oversold. The RSI ranges from zero to 100. When the indicator moves above 30, it is interpreted as a bullish signal and a stock buying opportunity. A reading above 70 is a bearish signal and a stock selling opportunity. A stock is considered oversold when the indicator reaches 30 and overbought when it reaches 70. An uptrend generally trades between the 40 to 80 range, while a downtrend trades between the 60 and 20 range.
Stochastic Oscillator Leading Indicator
The stochastic oscillator indicator uses a range of zero to 100 to identify possible trade entry and exit points. The two stochastic oscillator lines are identified as %K and %D. The indicator gives a bullish sign when the %K line crosses over the %D line. When the %K line falls underneath the %D line, you have a bearish sign. If at least one of the lines dips below 20 and then comes back up, it is considered a buy signal. When at least one of the lines rises above 80 then drops back down, it is a sell signal.
Commodity Channel Index Leading Indicator
Although originally developed for commodities, the Commodity Channel Index is an indicator used to signal cyclical turns in stocks. The CCI gives an entry signal to open a trade when it is above +100 and trade exit signals when it is below -100. A potentially bullish signal occurs when the indicator moves from the negative range into the positive range. The signal falling from the positive range into negative territory is a bearish signal. Since there is no upper or lower range limit with this indicator, identifying overbought tops and oversold bottoms is challenging.
Williams %R Leading Indicator
The Williams %R is a momentum-based leading indicator that identifies when a stock is overbought or oversold. Unlike the other leading indicators, Williams %R uses a negative trading range to predict stock movement. The indicator ranges from a low of -100 to a high of zero. A reading above -50 is a buy signal and a reading below -50 is a sell signal. A stock is overbought when the indicator reaches -20 and oversold when the reading is below -80. The Williams %R gives clear buy and sell signals and quickly identifies strong trends.
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