One of the reasons why we can lose when making transactions is the existence of false signals or false signals shown by the trading method that we use. Even so, false signals are actually not a big problem as long as we can manage risk properly and as long as they don’t appear often.
Every trading method must often show false signals. This is a very natural thing, because every trading method is based on price habit patterns. While the price movement itself is dynamic and it is possible to form new patterns beyond those that have been created as a method of technical analysis.
What are False Signals?
False signal or false signal is a condition when the indicator predicts price movement in a certain direction, but the price actually moves in the opposite direction. In situations like this, the transactions we make will automatically lose money, because they don’t match predictions or signals.
False signals are basically a natural thing and are related to the probability of the analytical method we use. The higher the probability of the method, the lower the chance of a false signal appearing. So, it doesn’t arise due to indicator errors in identifying market conditions and not because of the inability of traders or analysts to analyze the market.
False signals exist because every method of technical analysis, including technical indicators, is based on habitual patterns of price movements. For example, before the price experiences a reversal from bullish to bearish, the price often makes a double top pattern. The pattern is then used as a method to identify the market. So every time the double top pattern appears, traders and analysts will read it as an opportunity for the price to experience a reversal.
Is there always a double top pattern for every reversal price movement? Of course not, sometimes other patterns appear such as Head and Shoulders, rising wedge, triangle, triple top, rectangle and so on.
Then, does the double top always end in a reversal? Not really, sometimes the double top turns into a sideways or rectangle pattern, then the price continues its trending movement.
False Signal Risk
Realize it or not, false signals actually often appear in our trading activities. For example, the simplest and most frequently occurring is the price breaking out of the moving average line, which turns out to be reversed, even though it is usually trending.
The risks from false signals are basically the same as those of normal trading. These risks can be minimized if we apply capital and risk management properly. Therefore it is important to start getting used to discipline in capital and risk management.
Technical analysis has so far been loved by most traders because to be able to do technical analysis we only need the tools found in metatrader. But unfortunately in technical analysis there are also many cases where price movements actually give false signals which cause our accounts to experience losses. Therefore it’s a good idea for us to anticipate things like that, because in the forex market indeed all events can occur such as the case of the false signal.
So, how do you deal with true false signals, considering that for false signals themselves, traders will of course be fooled by the indicators they use, because it seems as if the indicators they use are unable to analyze the market anymore. So if we get false signals that are so frequent it is better to avoid using these indicators because it is feared that it will actually cause our account to experience more losses. I personally, if I have found a case of an indicator that has a false signal, I will immediately throw it away.
Some of the causes of indicators experiencing false signals include:
In the cause of the indicator experiencing false signals, we must first divide the indicator itself.
Indicators in forex are divided into two, namely trend indicators and oscillators
This trend indicator is one of the indicators used to be able to detect trends that are happening. As for the oscillator indicator itself, it is usually used to detect the momentum of price movements that will experience a reversal.
Now what you need to know is that the two technical indicators above are, of course, calculated based on mathematical values. Which means the value is based on data or history that is currently happening. Therefore it is actually very difficult to predict the direction of market movement. On the other hand, technical indicators will also calculate the movement of the data that is currently happening. So that most of the indicators in MT4 provide false signals that can deceive traders’ eyes.
An example is the moving average indicator where the data generated from the indicator comes from market history. That means when there is additional movement or additional candlesticks in the market, there will also be an update from the indicator. That is why there are many false signals due to the nature of indicators that are lagging or repaint.
Usually, false signals appear more often on small timeframes because on small timeframes, the slightest movement will change the signal that has already occurred. To reduce the ratio of the emergence of false signals, we can choose a fairly large trading timeframe, such as H4 or daily. Usually on that timeframe there will be fewer false signals compared to if we trade on the H30 or H1 timeframes.
Apart from using large timeframes, adding filter indicators can also minimize false signals that occur. For example, if previously we used 2 indicators as a reference for our daily analysis, then we can provide 1 additional indicator of a different type from the two previous indicators as an additional filter for us to analyze. In this way, we will get a better analytical picture than if we only use two indicators.
And what we have to be aware of is, of course, when there is high impact news, for example, when there is an FOMC or NFP where market movements can be very wild and unpredictable too, and when faced with a situation like this, of course we have choices that might be taken, one of them is to try not to trade when approaching high impact news. Indeed, running OP when the news is high impact will give us big profits in a very short time, but the risks are also big and make emotions unstable too, so trying to avoid it is also a wise choice, of course, especially for those who really want to trade with minimal risk.
