Tips for Avoiding “False Signal” in Forex Trading

Tips for Avoiding “False Signal” in Forex Trading

One method of analysis in forex trading is technical analysis and charting or technical analysis which utilizes price chart / chart is one of the most popular technical analysis methods. Chartists use charts to then use them to produce accurate signal trading . Or, at least it is expected to be accurate, or close to accurate.

The problem that is often encountered later is usually the appearance of ” false signal “, or the wrong signal. There are also those who call “fake signals  aka ” fake ” signals. This “fake” signal usually arises from technical indicators, both standard and costume.

If false signals appear too often, quite often a trader feels “deceived” by the technical indicators he uses, so he finally decides not to use these technical indicators.

It is undeniable that technical indicators cannot be “perfect” in the sense that “always true”. Furthermore, traders who use these indicators are ordinary people who can misinterpret the condition of technical indicators when they will open a position.

So, it can indeed be a technical indicator that is less qualified, there can also be a “human error  factor, where the interpretation of a trader is different from what actually happened.

In this paper, we will limit the discussion to avoid false signals on standard technical indicators in MetaTrader. If we want to discuss all the custom indicators circulating in the world of forex, I am afraid that it takes at least two terms of office of the president of Indonesia.

Technical Indicators

Let us first understand what is actually meant by technical indicators.Based on the MetaTrader definition, technical indicators are “mathematical manipulations” of prices and / or volumes that aim to estimate future price movements. Trading decisions about how and when to open or close a position can be made based on signals from technical indicators.

According to its function, technical indicators can be divided into two groups:

  • Trend indicator
  • Oscillator indicator

Trend indicators help us to observe the direction of prices and detect changes in direction directly or with a certain time lag. Oscillators allow us to look for “reversal momentum” directions.

Note the word “mathematical manipulation” in the definition of the technical indicators above. This means that technical indicators are actually “products” of the price movements that have occurred, because it processes existing data and through certain algorithms provides a “signal” which is then interpreted as a sell or buy signal.

Thus, the problem is then the interpretation of the use of the indicator, namely the trader.

Wrong interpretation

Technical indicators not only utilize the data of price movements that have occurred but also the price movements that occur. That is why – if you notice – technical indicators always move or change (up and down, appear-disappear, or change color) following the current price movements.

Take for example, Parabolic SAR. You will often find a SAR point appearing below the bar / candlestick, but then that point disappears and moves to the top of the bar / candlestick you are observing. That’s because before (based on the programming algorithm) the SAR point was supposed to be below the bar / candlestick, but because prices kept changing and made the SAR calculation change, then the SAR point then “moved places”.

In essence, technical indicators can change according to market conditions.

An example of a Parabolic SAR case is just one example. Maybe you often hear your fellow traders chattering, “Wow, the stochastic is cheating! “It’s been crossing up, uh, he’s coming down again!”

Actually, brothers and sisters, stochastic doesn’t cheat. We are the ones who often misinterpret stochastic conditions. That the signal from stochastic can fail, huh. But he doesn’t cheat.

Wait for Confirmation Closing Bar / Candlestick

To avoid “misunderstanding” or misinterpretation that gives rise to false signals , you need to wait until the signal that emerges from the technical indicators is truly confirmed .

I have explained above that technical indicators can change following the latest price developments, so the key is that you have to wait until the bar / candlestick you use is truly “complete”. What do you mean?

“Complete” here the meaning is ” closed “.

Let’s return to the accusation of ” stochastic cheats” earlier. For example, if you use H1 time frame candlesticks , then to confirm the signal from stochastic make sure the candlestick “age” is already one hour. Wait until the candlestick is closed , exactly one hour. The signals given by stochastic(buy or sell) will be more confirmed if the candlestick is completely closed .

Use Multiple Indicators

Another way to minimize “false signals  is to combine several technical indicators. This method is quite widely used by experienced traders. This combination of several indicators is then commonly referred to as a trading strategy .

Using a number of technical indicators, you will be able to see other “points of view”. For example, you combine Moving Average (MA) with stochastic . When stochastic shows a buy signal but the MA actually points down, you can be careful because the buy signal that appears may not be too strong, or it may be false , because it is against the trend that is happening.

But remember, you should not use too many indicators to avoid confusion. It is recommended to use a maximum of three different indicators on one chart.

Good luck.

News Feed