the above values we would conclude:
(0.70 80 pips) minus (0.30 40 pips) 3
= 132 pips. This means you could expect to make on average 132 pips every week.
Combining Leading & Lagging Indicators
So why include leading indicators in your trading system? The fact is, leading indicators have more predictive power, and can predict market moves before they occur. Lagging indicators cannot do this, however they can still complement other leading indicators. Some well known leading indicators include: pivot points, chart patterns, fibonacci retracements, and candlestick patterns.
In fact candlesticks are probably one of the most powerful leading indicators, since you are observing price action itself. Traders around the world have found that candlesticks can add an extra dimension to their trading system. The reason for this can be largely contributed to Steve Nisons book Japanese Candlestick Charting Techniques. Here is a quote from the book:
If you are a seasoned technician, you will discover how joining Japanese candlesticks with your other technical tools can create a powerful synergy of techniques.
Of course there are many different ways you can incorporate the use of leading indicators in your trading system. Here I have aimed at giving you a taste of what is possible. I also recommend that you check out investopedias lesson on how to develop a medium term trading system. This lesson also puts forward some interesting concepts which include combining leading indicators with other technical tools.
By including the use of leading indicators in your trading system, you will be able to add an edge to your system that will enable you to catch trends earlier, and hence make more money. And by understanding the basic mathematics involved in determining a trading systems profitability, you should be able to determine whether or not you have a good trading system.
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