False Trading Signals – What are you Talking About? Me? No. Yes?

Binary Options False Signals – Types of False Signals and how to Avoid Them

What am I talking about… I’m talking ‘bout losing money, mate. But it’s not because of you or the broker or some sort of platform hiccup. Nope, it’s because your trading indicators or system failed you and made you feel betrayed by what you believed to be your money making machine. Don’t worry, it happens with all strategies and indicators and no matter how good they are, they are all prone to false signals. So, can we avoid false signals?

Well, avoiding them completely is impossible if you ask me, but you can minimize the frequency they occur with. First let’s talk a bit about some of the types of false signals which happen in everyday trading and then, I will try to give you some solutions – emphasis on “try”.

1. The Stochastic Cross

Assuming you know what s stochastic indicator looks like and how it moves, you probably noticed that sometimes it appears to be crossed and then immediately it “un-crosses”. You see it has crossed, you enter the trade and when you check back in a few minutes, your trade is in negative territory and the stochastic crossover has disappeared. That’s a false cross signal. The thing is that stochastic is derived from price, so if price moves in one direction, it will determine the stochastic to do the same. But price has a mind of its own (or not) and as soon as it reverses direction, it will drag the stochastic in the new direction. Now let’s say you trade a 15 minute chart and during a 15 minutes candle, price moves down, triggering a cross of stochastic. Until the 15 minutes pass and the candle closes, the cross can disappear. In other words, anything can happen until your candle is closed and this applies to Moving Averages, MACD, RSI and basically all indicators which are calculated using the “Close”.

Solution

wait until your candle is closed and the cross is “locked”. The stochastic (or any of the indicators I mentioned) will not “un-cross” if the candle has closed. Of course, a new cross in the opposite direction can occur, but you cannot control that.

2. The Fake Breakout

Price is often moving in a tight range – a horizontal channel if you like. A breakout is… a break out of that channel (that explanation was easy). There are other types of breakouts but that’s not our focus right now. Ok so you see a breakout and you decide to trade in that direction but price almost immediately reverses and starts moving in the opposite direction. You are dealing with a false breakout signal and there’s a simple…

Solution

once price moves past your support or resistance level (the upper part of the channel is resistance and the lower part is support), you will do exactly Nothing. Yep, you just sit and wait for price to return to the previously broken level. If you see the level is holding and price tries to push away from it in the direction of the original break, it means the breakout was a true one. Needless to say that if price goes thru the recently broken level, it means the original breakout was a false one. Sometimes after the initial break, price will just keep on going without returning to retest the recently broken level. Tough luck, you missed a trade, but using this little “trick” (not really a trick but rather a well known style of trading), you’ll avoid a lot of false breakouts.

3. Repainting Indicators

These are liars by definition and all they do is give you false signals. If you want to know more about them, you might want to read this article on trading tools and indicators. Basically these indicators give you a signal (they show an arrow or a cross, etc) and if price moves in the opposite direction, the signal will be “repainted” as in: moved to a more suitable location. Say you get a Down arrow but price continues upwards. When a top is finally established (maybe 50 pips higher) and price finally starts to move down, your indicator will delete the first arrow and will print a new one exactly at the top. This will make it look like the Holy Grail of indicators… if you look at it some while after the move occurred (so it has time to finish its masterpiece painting). In real time though… useless. I have a…

Solution

don’t use repainting indicators if you don’t want a bunch of false signals.

The Bottom line – Can We Get Rid of False Signals?

Well, we can’t get rid of them completely, but using the solutions above can minimize their impact. The thing is that all indicators and strategies will have false signals. Even if you wait for the candle to close (in the case of the stochastic) or if you wait for a retest (in the case of the breakout), or if you respect all the rules of your strategy, there’s nothing protecting you against a sudden price reversal, but at least you did all that you were supposed to. If the trade still ends up Out of the Money, don’t despair, the market loves to give you false signals. You just have to limit them by taking only high probability trades.