Leading indicator
What does it mean when a measure is called a leading indicator, and how would you check whether it truly moves before price?
In plain words
A leading indicator is a measure that is claimed to change before the price of an asset does, so that watching it gives early notice of a move. The claim is a statement about timing: the indicator shifts first, price follows.
Why it matters
If a measure genuinely leads, it can add warning time to a risk process. But many apparent leaders are artefacts of fitting rules to past data. A lead must be shown by repeated, out-of-sample evidence that the indicator's shift consistently arrives before the price shift, not merely alongside it.
In a real week: BTC, week of 18 April 2022
In the week of 18 April 2022, BTC perpetual funding averaged -0.0034% per eight hours and fell as low as -0.0183%, meaning shorts were paying to hold. One common claim is that such negative funding leads price higher. BTC instead returned -0.57%, with the largest one-hour move -2.5% early Monday and a close in the lower third of the week range (20.6%). A single week neither confirms nor refutes the claim; testing requires many weeks.
A common mistake
Calling a measure leading because it happened to move before price once. Coincidence in one week is common; a lead must survive many independent periods and hold out of sample.