False Signals:
We can always see some false signals. True signals are easier to catch because they are strong and obvious. A good trader is someone who can distinguish and avoid the false signals.
There are false range breakouts and also false reversal signals. Those who like to trade reversals will be encountered with more false signals because a trend can be continued for a long time and it is not easy to say when a reversal happens. If you like to avoid being trapped by false reversal signals just ignore the very first two reversal signala when there is a strong trend. Of course if you really wait for a big and strong breakout and you don’t rush to take a position when you see a weak and partial breakout you will have less number of false reversal. For example some traders take a short position when they see the below signal but as you see this is not a strong signal in comparison to the sig
nals I showed above:
Why is the above signal a false signal?
1. The uptrend is a strong uptrend and this signal is the very first reversal signal. What do I mean by strong uptrend? Look at the uptrend slope. It is a sharp slope that is going up strongly. There is no sign of exhaustion in it yet. A trend should show the exhaustion signals to tell us that reversal is close.
2. Although about 50% of both #1 and #2 candlesticks are placed out of the Bollinger Upper Band, this can not be considered as a strong signal because
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Both candles are not long enough and are relatively short candles.
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They don’t have any big upper shadow that reflects the power of a downward pressure.
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The second candle is very short and the first candle is not covered by it strongly.
Can you mention any more reason?
Here is two other examples for such a false reversal signal:
