What Is a Lagging Indicator?

By Samantha Baltodano

TL;DR:

A lagging indicator is a financial sign that confirms trends but doesn't predict them. It uses past data to indicate where the price of an asset may be headed. 

For example, a 50-day moving average takes the past 50 days of closing prices, calculates the average, and plots it on a chart to identify trends or potential areas of support/resistance. 

It's called "lagging" because it's based on past data and can be slow to respond to market changes but it can also be used to confirm a trend or signal.

What Is a Lagging Indicator?

A lagging indicator is a financial sign that becomes obvious only after a large shift has taken place. So, lagging indicators confirm long-term trends, but they do not predict them.

This is useful because oftentimes, many leading indicators are volatile, and short-term fluctuations in them can obscure turning points or lead to false signals.

Looking at lagging indicators is one way to confirm whether a shift in the economy has actually occurred.

Lagging Technical Indicators

A lagging technical indicator uses past data to indicate where the price of an asset may be headed. 

For example, let's say you're looking at a stock chart and want to use the 50-day moving average as a lagging indicator. The 50-day moving average would take the past 50 days of the stock's closing prices, add them together and then divide by 50 to get the average closing price for those 50 days.

This average closing price is then plotted on the chart, and can be used as a way to help identify trends or potential areas of support or resistance. 

If the stock's current price is above the 50-day moving average, it could be a sign that the stock is in an uptrend. If the stock's price is below the 50-day moving average, it could be a sign that the stock is in a downtrend.

The name "lagging" comes from the fact that this indicator is based on past data and can be slow to respond to changes in the market. It can also be used to confirm a trend or signal.

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