The use of technical indicators in trading no doubt can give you various indications like the current trend, the strength of the trend level of volume and indications of any possible trend reversal. But few of them are very popular like Moving Averages, RSI, MACD and Suptertrend are few of them very popular among the traders.

Though these indicators can give you various signals that you can use to trade it is not guaranteed or sure every time the signal is true, sometimes there could be a false signal. Hence, you need to avoid or be aware of such false signals that can encourage you to enter into a trade position. Today we are going to talk about how you can avoid false signals by technical indicators like RSI and moving averages etc.

What is a False Signal in Trading?

In terms of technical analysis, a false signal means the indication of an indicator about the market movement or individual stock with inaccuracy or you can say showing incorrect indications. The reasons behind such false signals could be due to technical factors including lag of time, abnormalities in data, or incapability of algorithms used to develop such indicators.
Also Read: Is Technical Analysis Useful or Useless or Enough for Trading
The false signal could be not identifiable at the initial stage but it can cost you in terms of huge losses, especially when you enter a high-risk trade position. Hence, avoiding false signals is necessary to avoid such losses, especially when you are entering into high-risk trades like future and options. There are various ways to avoid such false signals that you need to know.

How to Avoid False Signals in Trading?

Though identifying the true signals given by the technical indicators is already a challenge, relying on a single indicator is one of the foolish decisions in trading. You should apply and consider multiple indicators and use other tools and techniques in trading to avoid false signals. However, let's find out what are the factors you should consider to avoid the false signal.

Choose the Right Indicator

Many traders pick the wrong indicators as per their trading strategy which becomes a failure for them as they do not get the accurate signal and enter into the wrong trade positions. In fact, all the technical indicators are not useful or work for all types of trading patterns. Some of the technical indicators are suitable for intraday trading, some of them work for positional-based trading and some of them are suitable for medium to long-term investment. Similarly, some indicators are suitable for option trading.

Here you need to pick the right technical indicator as per your trading strategy. For intraday trading, you can use the RSI, Bollinger Bands or MACD. While for positional trading, you should use price indicators like support and resistance, breakout or volume-based indicators. Similarly, for options trading, you should also use the open interest and put-call ratio (PCR) indicator to get the right signal.

Also Read: Five Best Support and Resistance Indicators in TradingView

Use the Multiple Indicators

Relying on the single indicators is not a wise decision, due to lack of proper market data or irregularities in the trading patterns. Such single indicators can give you a false signal in certain market conditions or when the market behaves abnormally and moves in an unexpected direction. Here you need to choose the multiple indicators and use the combination of all signals to make the right trade decision.

You can use a combination of popular indicators like RSI, Moving Averages, MACD and other oscillators to get indications that are more meaningful. Based on your trading strategy and time horizon you can pick the right indicator that can give you a true signal even in changing market conditions.

Use the Multiple Time Frames

Applying the technical indicators using a single time frame is one of the biggest mistakes traders make in trading. When you trade with a broader market perspective, you need to use a different time frame. Similarly, the time frame for intraday trading would be different from trading for positional and medium-term trading.

In day trading you, need to use indicators with time frames of minutes and hours, while for positional trading you need to use higher time frames like daily, weekly or monthly. The minor fluctuations will not represent the long-term trend in the market will help you to avoid false signals.

Also Read: How to Identify Trend in Stock Market: 10 Points to Find Trend

Consider the Fundamental Factors

Though for trading, technical analysis is very important fundamental analysis is equally also very important to analyse the market and identify its possible moves. Sometimes due to fundamental factors, the stock price of the company moves, and such moves are also visible through technical indicators.

Suppose a company has reported its quarterly financial results better than the expectations or secured a large order book, then the volume of trades with uptrend trading activities can be signal given by the indicators. However, if there are no such positive fundamental factors, the signal could be false.

Trade with Risk Management

To avoid the impact of such false signals in trading you should always trade with proper risk management. Use the stop loss or position sizing to avoid the risks created because of such false signals. While in option trading you should enter into multiple trade positions to cover your trade position and minimize the risk of losses that can occur relying on indicators giving the false signals.

Trading with proper risk management is always important if you are an intraday trader or trade-in options. The technical indicators can give you indications based on past moves and current behaviour, but in the next move, the trend couldchange or against your trade position.

Correlate with Market Trends

Travelling against winds or swimming against watercourse would be not only risky but can make it difficult to exit from trading positions. Similarly, when you trade against the market trend you need to be very cautious while entering into such trade positions.

The technical indicators showing the indication as per the market can be reliable, but when it signals against the trend, it could be false or not sustained for the period. Here you need to correlate the indications given by such indicators as per the market trend to avoid false signals.

Confirmation of the Volume

This is one of the best ways to avoid the false signal in trading. Any uptrend, downtrend, or breakout of the stock move if not supported by the significant volume of trades, it means it could be a false move. If the indicator is giving a signal that is also well-supported by volume surging in the trading, it means the trend is likely to continue and you can enter into such trade positions.

Also Read: Importance of Volume in Technical Analysis: Use & Role in Trading

To confirm the volume you should check and compare the average daily volume with a particular day volume when stock price moves significantly. However, you can also use the volume-based various technical indicators that can give you volume-based trends in the market. If indicators are giving a signal not supported by the volume it means there could be a false signal and avoid entering into such trade positions.

Avoid Speculative News & Updates

Unexpected news and updates are the move of the biggest reason behind the unexpected movement of the market. When news or updates like economic data, monetary policy actions or other economic or corporate actions are about to be declared you should avoid relying on the indicators. On the eve of such news or scheduled announcements, the technical indicators are indecisive.

These indicators can give false signals on such speculative news and press releases. You need to avoid taking cues from such indicators a few minutes before and after the announcement of such news. And the best way is to avoid trading on such speculative news and updates.

Avoid Trading in Highly Volatile Market

When the market is highly volatile, the technical indicators can give false signals as the market moves with unexpected swings making it difficult for the algorithms to predict the next move. Check the volatility index (VIX) or implied volatility of the underlying security and when applying a technical indicator it is not necessary it give you the right signal, in such unstable market conditions.

However, you should avoid trading in the highly volatile market or to get results that are more accurate you should use the market volatility indicators like VIX, ATR, and Bollinger Bands that can give you more signals that are accurate compared to other technical indicators. Apart from this to avoid the false signals by indicators in the volatile market, you should trade with the right strategy.

Chart Patterns for Confirmation

Another best way to avoid the false signal in trading is to use the candlestick chart patterns to confirm the indication or trend. However, applying the technical indicators on the candlestick chart pattern on TradingView-like software can give you a better analysis. However, analysing the patterns and formations of candlestick charts to confirm the signal given by the indicator will help you avoid false signals.

There are various types of bearish and bullish candlesticks chart patterns that you can use to confirm the signals. You can use the combination of multiple candlestick chart patterns to find out the support and resistance levels or breakout and breakdown in the price movement. Combining the technical indicators with chart patterns can help you avoid false signals and reduce the risk of entering into trade positions too early or too late with the probability of improving chances of success.

How to Avoid False Signals in Trading With One Indicator?

Using the signal indicator in the trading could be unreliable as it can give you a false signal. Hence, you should use the combination of multiple indicators to confirm the trade signals. However, if you still prefer to use a single indicator like RSI, MACD or Supertrend you should consider a few things in mind. Below we brought here how you can avoid false signals given by the top indicators.

How to avoid RSI False Signals?

The RSI or relative strength index can give an indication of market trading in the oversold or overbought zone. When RSI is trading below 30, it is considered oversold and when RSI is above 70, it means the market or underlying security is trading in the overbought zone. Sometimes the signal could be false, here to avoid RSI false signalsyou can use it with support and resistance. You can rely on RSI when the price is near key support or resistance that you can identify with previous swing highs or lows and trend lines.

Also Read: How to Add & Use RSI Indicator in TradingView: RSI Settings & Strategy

How to Avoid False Signals in Moving Average?

The moving average indicators also sometimes do not give the true picture of the trend in the market. In fact, this indicator is quite useful in recognizing the state of the market but it can lag in choppy markets. Hence, to avoid any false signal by this indicator you need to analyse the volume strength with moving average crossover, as high volume supports a bullish or bearish trend and low volume means the indication could be false. On the other hand in a volatile market, you need to adjust the sensitivity, like using the shorter period Mas when the market is not volatile and longer period MAs when the market is volatile.

How to avoid MACD False Signals?

MACD or moving average convergence divergence another useful indicator in technical analysis you can use to identify the direction, momentum, and changes in the strength and duration of a trend in a stock's price. When you apply this on the chart two lines oscillate without boundaries and the crossover of these two lines gives trading signals similar to a two-moving average system. To avoid the false signal by MACD you can use the RSI and moving averages with trading volume to validate the strong momentum in the market.

How to Avoid False Signals in Supertrend?

This is another useful indicator you can use to identify whether a financial instrument is in an uptrend or downtrend. To give a clear picture of market conditions to traders this indicator links several time frames but when the market is choppy or trades with sideways movement it can give a false signal. Hence, the best way to void the false signal is to use this indicator with a moving average crossover within the right time frames.

Conclusion

When the market is highly volatile or the volumes do not support trades, then there are huge chances of false signals given by the various technical indicators. To avoid such false signals in trading you can use the multiple time frames as per your trading period perspective and use the combination of multiple other technical indicators to confirm or validate the indication and trend.

Also Read: How to Add or Remove, Hide & Save Indicators in TradingView

Apart from that, you should also consider the volume of trades and fundamental factors to validate the signals. And avoid speculative trades when news and events are about to be declared avoid trading in a volatile market and always trade with risk management to avoid major losses.

Trading with market trends and choosing the right indicator as per your trading strategy are some of the ways to avoid false signals. And the last thing avoid using the charts showing the lagging signals of the indicators, use the best charting software like TradingView and other best online trading platforms like Moneysukh Pro to utilize the power of predictive analysis by technical indicators.