Leading indicators are used by traders to predict imminent changes in a market. Since leading indicators change before an actual market changes, traders consider them important as guidelines for investing wisely to take advantage of price events before they occur.
In some cases, leading indicators are useful mainly as a guideline for potential change in a market, rather than assured change. For example, information about employment records, building permit applications and prominent changes in the executive lineup of a corporation can reflect coming changes in the production level of the corresponding asset, or in the buying or selling pressure on that asset. However, this kind of leading indicator should be used as a guideline to investment rather than as a sure-fire prediction of future events.
In other cases, leading indicators can actually change the behavior of a market. A number of leading indicators–among them unemployment insurance claims, the amount of money in the economy, and increases in the production workweek–are watched by the Federal Reserve in order to determine whether or not to change the interest rate. Thus some traders watch these leading indicators carefully, and if enough leading indicators seem to point to the fact that the Fed is preparing a change in interest rates, traders can take the appropriate actions.« Back to Glossary Index