Many traders, opening a position, ask themselves the question: ” Why did my position close with a loss, after all, it seems that I did everything right? The signals on the trading strategy almost coincided, but in the end the price went in the opposite direction .” The key word in this question is “almost”. Sometimes there are movements in the market that cannot be predicted or calculated, indicators in this case are also practically useless. So what could have happened and what went wrong? The answer is simple: the trading strategy gave a false signal, and as a result, the trader received a losing trade. Let’s try to figure out why this is happening and why false trading signals appear.
Why are there false signals?
The most common cause of false signals in the market is undoubtedly news. As you know, the market takes into account everything, and even before the official publication of the news, the quotes act out the situation and begin to move in any direction. Usually, if news comes out where, according to preliminary data, the result will be better than predicted (for example, reports on GDP ), then quotations will rise. But, as practice shows, growth occurs even before the publication of the news itself, and during the data update, the market makes a sharp reversal and begins a rapid decline. At this moment, Stop Loss orders are triggered for those traders who opened positions in advance; impatient market participants who want to earn very quickly and a lot are adding excitement. A few minutes after the news was published, the market calms down and the price starts moving in the right direction.
Errors in indicator calculations
Another reason why false signals appear in trading is errors in indicator readings. Many traders do not take into account the fact that the indicator, after sharp movements in the market, receives highly distorted data, and an error is formed in the calculations. In turn, impatient traders decide that this is a signal to enter a trade and end up with a losing position.
False level breakouts
In technical analysis, the most common false signals are false level breakouts . When trading on support or resistance levels, there are two ways to open a position – breakout or bounce. In these cases, market participants are misled. Let’s consider trading on a rebound from resistance levels. The price reached the level and the trader decided to open a sell trade. At the same time, Stop Loss is set beyond the resistance level (into the safe zone), but the price breaks the level and closes the sell trade at Stop Loss. What do impatient traders do in this case? As a rule, a trade is opened in the opposite direction (to buy), and as a result, the position is closed again by Stop Loss. The conclusion here is very simple: haste and impatience are bad helpers in trading.
When trading using candlestick analysis , the situation is almost the same. The trader begins to rush to open a position in advance, and eventually opens a losing one. To avoid unprofitable positions or at least reduce their number, it is necessary to study the formation of Japanese cross-sections in more depth and understand the signals for opening a trade.
How to avoid false signals?
As mentioned above, it is most likely impossible to avoid completely false signals, but any trader can reduce their number. You just need to follow a few rules for entering the market.
Market entry rules
1. Look at history when trading the news When trading on fundamental analysis, you need to study the impact of news on the market by history. Often the market reacts to the news release every time in the same way, this reaction can be calculated, and the right decision can be made in advance.
- Do not rush to open an order in the opposite direction You should not immediately open a position in the opposite direction, if the first one closed by Stop Loss. In most cases, the market will move in the direction in which the original position was opened. It will be important to emphasize that the opening of an order in the opposite direction occurs not according to a trading strategy, but on emotions.
- Test entry points on history and demo account When trading using indicator strategies, it is necessary to test the entry points in advance on history and on a demo account . In this case, there will be a clear understanding of which signals the indicators give, and which signal is primary and which will be additional. The Moving Average indicator is very tricky in this case . The reason is that the signal coming from the moving averages is their intersection, but exactly where the intersection is considered complete is not very clear. Often, after the contact, the two moving averages simply diverge without crossing, while the trader, having decided that this is an intersection, enters the deal, and as a result – a losing position. In this case, the most optimal option for making a decision would be to use an additional filter, for example, a Fractal breakout or the closing of the current candle.
- Decide on the chart analysis patterns for opening positions When trading on technical analysis, it is necessary to study chart patterns and decide in advance which ones you will use to open positions. As practice shows, not everyone is able to clearly identify the entries for all figures with the same efficiency. To avoid false entries when working out the figures, it is necessary to clearly determine in advance the point of entry into the transaction. Often, when the neckline is broken at the “Head and Shoulders” pattern, a return to the broken level occurs, and only after that the true signal processing begins.
- Choose some clear patterns when analyzing Japanese candlesticks When trading Japanese candlesticks, it is even more important to understand the formation of patterns and study signals from history. The most optimal option would be to choose several clear candlestick combinations for yourself and filter out signals that have something incomprehensible to the trader. Each candlestick combination has its own nuances of signal formation and processing. For example, the Pin Bar pattern is based on the fact that it misleads market participants with a rapid directional movement (for example, growth), after which the quotes sharply change the direction of movement, and a reversal occurs . The Doji pattern, on the contrary, is characterized by a slight movement, as if the market is thinking about what to do and where to move next, after which the trend reversals.
When trading on any trading strategy, you must strictly follow the algorithm created in advance. You should not make adjustments to the algorithm on the go or during trading and try to adjust it to the current situation. On the contrary, the situation should develop in such a way as to fit the algorithm for opening a deal. The most important thing is not to rush to make rash and fleeting decisions. Undoubtedly, speed is a priority for scalping strategies , but here you need to understand that these strategies are very difficult to apply for newcomers to the market. A well-thought-out decision will be the key to successful transactions.