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How to Identify False Signals in the Market

The financial market is one of the most volatile place for business. It’s full of risk and uncertainties that could swallow up a trader and his or her hard-earned money without a moment’s notice.

The way that market players are able to regulate is through intensive analysis, informed anticipation, and formulation of trading strategies. Traders use various charting tools and technical analysis techniques to determine what the most probable next movement of the market is.

However, there are times when despite the perfect technical analysis and the correct use of charting tools, traders still lose profits. These are mostly because of false signals. False signals are indications or clues to a likely price movement which turn out to be highly inaccurate. Traders who accidentally use false signals in their technical analysis is in for a losing trade.

While it may seem like an already hard work conduct technical analysis itself, now you’ll also have to worry over the validity of the factors or signals you use. Well, for expert traders, identifying and avoiding false signals has become significantly easier because of one thing: getting rid of market noise.

Market noise is any data that causes the trend line to appear deceiving by hiding the real and underlying trend. An example of market noise are intraday volatility and the presence of small correction. Market noise generally obstructs the true trend line. Because of this traders are tricked into moving according to falsely anticipated price movements.

Expert traders are able to identify false signals through the effective nullification of market noise.

The ways to implement these effectively are through the following:

1. Averaging candlesticks to remove intraday fluctuations as well as short-term trend changes.

2. Using renko chart. The renko chart takes into consideration all price movements without accounting time or volume. However this may prove to be difficult to integrate with other charting functions.

3. Using the Heikin-Ashi chart. The Heikin-Ashi chart converts candlestick charts  into a chart with clear trend change indicators. Unlike the renko chart, it still takes into consideration time.  

4. Using multiple indicators. By integrating more than one indicator, traders get a more accurate picture of the trend line and identify true elements of a price line.

Identifying false signals are easy as long as you be smarter than the chart.

Created by : Chuck
Published : 14 Jul 2016

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