We often split signals into two tidy categories: leading indicators that foreshadow change and lagging indicators that confirm it. But in practice, the boundary is often less clear. Whether a signal leads or lags depends on the observer’s horizon, the market, and the liquidity profile that governs how information and capital flow.
I was trained to think about this framing for financial markets but I think it’s perhaps even more powerful to use it as a lens to manage emotions and choose behaviors in everyday life.
A technical framing
Leading indicator = a signal that changes before the underlying variable.
Lagging indicator = a signal that changes after the underlying variable.
Liquidity determines speed and amplitude. Low liquidity amplifies moves and can make an otherwise lagging asset appear leading because price shifts sharply on small flow. Imagine a house party with four people sitting quietly in the living room. One energetic friend walks in, starts telling jokes, and suddenly the whole room feels wild and loud. It feels like St. Tropez because there were so few people that one person’s energy completely flipped the mood.
Continuous markets with fast settlement (e.g. Bitcoin’s 24/7/365) compress the time between information and price, moving indicators toward the “vanishing point” where leading ≈ lagging.
Actors
Different actors have different timeframes and information sets. An indicator may be leading for one actor (high-frequency trader) and lagging for another (pension fund reallocating quarterly). When institutions and new liquidity providers enter (e.g. ETF adoption), the dynamic shifts; indicators that previously led may become more lagged as markets deepen.
Beyond finance
When we think … we either anticipate or confirm. People with a leading mindset look for early signals such as changes in behavior, then act proactively. This is ideal for seizing opportunities but carries false-positive risk. Those with a lagging mindset wait for confirmation (proof from others that patterns exist). They don’t have trustworthy pattern recognition of their own. Safer hands sink less ships and also miss more opportunities, sometimes leading to regret.
Over‑reliance on perfect confirmation can feed analysis-paralysis which in turn can create missed opportunities that feel regretful or FOMO‑inducing. Recognize the tradeoff: more confirmed evidence usually means fewer opportunities.
When the cost of a false positive is low it makes sense to act on early signals.
The best traders develop design principles and build systems: balance sheets, stop rules, time for reflection. This mitigates single signal anxiety, instead it builds responsiveness to broader patterns. It avoids one voice or data stream from overpowering decision making.
Many indicators are socially constructed (e.g. media narratives, political incentives). Their leading or lagging roles can flip with regime change. Relatedly, it’s important to have awareness whether the signal is endogenous (arising from the system you’re part of) or exogenous (coming from outside). Endogenous signals can be self-reinforcing; exogenous ones are purer but rarer.
Key takeaways
Understand your risk tolerance;
Defer to taking action when the cost of false positives is low;
Protect downside with buffers so you can live to trade another day
Liquidity is the mechanism that determines whether an instrument behaves like a leading indicator or a lagging one. It determine how quickly and how far prices human behavior moves when new information arrives. In thin or fragmented markets novel situations, human behavior can be amplified, making an asset a person appear to lead broader markets society; in deep, highly correlated markets human interactions, human behavior may simply echo prior moves (i.e. herd mentality).
The sweet spot is understanding where a given situation sits on a spectrum and choosing a consistent decision rule
The music in this post was created by A.I. and pushed by Spotify to me via my Discover Weekly playlist. It slaps don’t you think?
The original song 👇🏽
