How Can You Avoid a False Signal?

You don’t have to be tricked by false signals. Working with a few strategies for managing such signals always helps you to figure out what is happening so you do not fall for a trade that will go south quickly. These strategies are not necessarily going to prevent a false signal from occurring. They will only help you to discover why the stock reached such a signal.

Use Only the Averages

The first tip is to look at how the averages on a chart are moving. It is easier to spot a false signal when you get rid of as much noise as possible. By working with only the averages on a stock, you are keeping the data to a minimum.

As the averages are revealed, it becomes easier for the stock to show the changes it goes through in a typical day. You can look at some of the shorter trend changes and see how long they last. When you look at those changes, you will start to get an idea of when false signals might develop. You will know that the stock will naturally change over time while understanding when the next change will be to your general benefit for a trade or option.

Use the Renko Chart

The Renko chart is the next feature to look into as you try to get information on the stock. It does not focus on volume or time but rather on how the price changes. The general consideration of the chart is that it looks at basic price movements without focusing on the minor ones. You might see how the prices look each day over time. You could see that the price keeps on moving up or down over a prolonged time with a few minor cases where the price goes in the opposite direction.

It is easier to identify a change in the trend when the number of bricks on the Renko chart is reviewed. Sometimes a trend can be confirmed when 15 of the last 20 bricks are moving in the same direction. You should watch for how the last few bricks are arranged to see if there is a chance that the trend will go in the opposite direction.

Use the Heikin-Ashi Chart

Another chart to use is the Heikin-Ashi Chart. It is made to look like a basic candlestick chart but with a few extra features. It is like the opposite of the Renko chart in that the Heikin-Ashi Chart is a little more detailed. The Heikin-Ashi Chart looks at four points in each candlestick:

1. The average price within the bar being formed
2. The midpoint of the bar that came before it
3. The highest total value in that set
4. The lowest value

The empty sticks are ones showing that the stock is moving up while the filled ones show it going down. Some shadows will be featured on the top and bottom showing how the volume of a stock is changing. The chart helps you avoid false signals by looking at many features:

• You can see an uptrend when the candles are empty but their shadows at the bottom are minimal.
• When the candles are filled, there is a downtrend. The trend will be even higher when the upper shadows are small.
• When a candle features a small body while there are strong shadows on the top and bottom, it suggests that a trend is about to change.

This is a more reliable way of identifying how a stock’s value might change without worrying about false signals. You might be surprised by some of the changes that can happen as the value of the stock shifts and moves.