Why indicators lag
Every indicator is calculated from past prices and can therefore only describe what already happened. Expect more, and you've misunderstood the tool.
An indicator is a formula applied to past prices. It can't contain anything that wasn't already in the price. That's not a criticism, it's a definition.
That implies the most important limit: an indicator describes a state, it doesn't predict one. If someone tells you a signal predicted a move, they've got the order backward.
The second limit is delay. Every smoothing costs time. A reliable indicator reacts late. A fast-reacting indicator gives many false signals. That's a trade-off, not a solvable problem.
The third limit is what happens when you look at many indicators at once. Look at enough of them, and you'll find confirmation for any decision. At that point you no longer have analysis, you have a justification machine for what you wanted to do anyway.
Formally, most indicators are filters applied to the price time series. Causal filters, using only past values, necessarily carry a phase lag. That delay can be shaped and redistributed, but not eliminated, as long as no future values are included.
That implies a fundamental trade-off between smoothing and reaction time. More smoothing reduces false signals and increases delay; less does the opposite. Optimizing this parameter against historical data regularly produces overfitting, since the optimum depends on the period examined.
Using several indicators together raises apparent confirmation without expanding the information base, since they're all derived from the same price series and correlate highly with each other. A combination only reduces uncertainty if its components contribute independent information, which by construction isn't the case here.
Summary
- An indicator describes, it doesn't forecast.
- Reliability and speed are a trade-off, not a solvable problem.
- Many indicators create apparent confirmation without new information.
Did you get it?
Why can't an indicator contain the future?
Because it's calculated entirely from past prices.
What's the fundamental trade-off in every smoothing choice?
More smoothing means fewer false signals and more delay; less smoothing means the opposite.
Why does combining many indicators help little?
Because they come from the same price series and correlate highly, contributing no independent information.
Related
- Why prices moveStage 0
- RSI, MACD, and Bollinger BandsStage 3
- Moving averagesStage 3