Tips To Recognize False Signals In Forex Trading

Finding ideal trade setups in the fast-moving forex market is not an easy task for an average newbie. Thus, we often rely on forex signals to simplify the tedious analysis process which can take hours. When there is a clear signal about the potential price movement or market trend, you can easily spot lucrative trading opportunities without feeling lost in the vast amount of data displayed on price charts. However, you should not become a blind follower of these signals as false signals are quite common in the volatile currency market and you should cross-check a signal before making a trading decision.

If you end up trusting a false signal and entering a trade, you will end up encountering losses. You have to be extra careful while choosing signal services and follow a cautious approach. In this blog, I will be sharing some valuable insights about forex trading signals and how you can identify false signals while trading.

What Are Forex Signals?

The purpose of a forex signal is to pass on information just like any other signal but here the message that gets conveyed is a suggestion about a trading opportunity that you can consider in the Fx market. It tells you the specific price level for opening a trade with a particular currency pair and this way, you can seize such opportunities in a timely manner. These signals can be generated by various indicators or by an automated trading system or EA that you have employed to trade with ease.

You can also find a lot of manual signal providers, which are traders with enough expertise to determine potential entry points for a profitable trade. Both automated and manual signals can be beneficial for a trader as long as they are from a reliable source. Manual signal providers are traders with years of experience and this enables them to execute successful trades by spotting the best signals or trade triggers. You can also improve your success rate by following legit forex traders sharing their trading signals.

You can find signal services on forex trading platforms as well. MT4 and MT5 top the list when it comes to powerful trading softwares that suits the requirements of forex traders. Beginners and traditional traders prefer MT4 and modern traders who are keen to explore advanced tools and features find MT5 to be a perfect place for executing complex strategies. The free trading application provides superior trading experience in multiple markets. You can check out the signal providers and services on these platforms.

Significance of Signals In Forex Trading

When you receive a trading signal, it not only tells you about a trading opportunity that has emerged in a currency pair but also provides relevant information about the ongoing market trends, reversal possibilities, interpretation of various patterns formed on the price chart and even some valuable insights or findings from fundamental analysis. All of these can greatly enhance your decision-making skills as the more things you know about the market, the more proficient you become as a trader.

Thus, forex signals can be a great aid for deciding the best course of action at a given moment. But like I said earlier, not all signals are 100% correct and false signals can lead to forced trades that yield no result but increase the risk that you are exposed to. Still, signals are very popular among new traders who are still in the learning phase. Even seasoned traders depend on signals to save their time and get the work done with minimal effort instead of investing all their time in performing in-depth market analysis.

So, we can say that signal services are well-liked by all types of traders no matter what trading style or strategy they have adopted. Signal services can also be a solution to your bad trading habits such as impulsive trading and emotional trading. You can get rid of your emotional bias by entering trades based on the signals that are generated in a system or shared by a provider of your choice. But in any case, you have to watch out for false signals.

6 Ways To Detect False Forex Signals

1. Stay True To Your Strategy

Many traders fail to recognise false signals as they are not in tune with their own trading plans and strategy. They execute random trades just based on the signals and many times these trades are not in line with their strategy and trading style. Some traders even take excess risk beyond their tolerance level and this can put your account in grave danger as the drawdown will rise.

To avoid such mistakes, you should only trade the signals that align with your strategy and avoid trading those that don’t sit well with your plan. Besides a signal service, you need to use trading calculators, which help you find position size, profit, pip, margin, leverage and other values accurately. When you subscribe to a signal service, you should test it on your demo account first as the simulated market environment can be used to evaluate the effectiveness of these signals while being free from the risks.

2. Analysis With Multiple Time Frames

Many traders just select one timeframe for the price chart and their entire analysis is based on the fluctuations that happened in this duration. But this may not give you a clear picture of the market situation as there will be changes in patterns and other variations that go unnoticed when you only consider one timeframe. This can lead to many false trading signals and this problem can be solved by using multiple time frames for technical analysis.

Hence, we should analyse the market across different time frames by utilising charting tools. You can use different minute charts, hourly charts and even weekly charts to see the direction in which the market is moving over a period. You should try this technique even if you follow a short-term strategy like scalping or day trading.

Swing traders and position traders always consider longer timeframes for analysis and when you combine both short and long time frames, the accuracy of your predictions can be enhanced as false signals can be identified and avoided.  

3. Add Indicators For Confirmation

You should add some simple yet reliable indicators to your charts and the information given by these indicators can be used to confirm a trading signal. These are additional indicators that you consider after finding a trading signal from the primary ones. RSI and Oscillators can be a great addition to your chart and even MACD that reveals the convergence and divergence can be a good confirmation indicator.

4. Assess Market Volatility

The chances of false signals are highest when there is extreme volatility in a currency pair. This can happen after an important economic data release or other impactful news events. Whatever factor or force has caused the sudden volatility, you have to be extra careful with the signals you get during volatile hours. Because the market situation can change in the blink of an eye and this will invalidate the signals released before that.

5. Set Realistic Targets

Your profit targets should be realistic and attainable which means that your expectations have to be reasonable. Some traders need to touch the grass as their goals and expectations from trade are too far from reality. The inability to follow a practical approach can cost you a lot in live trading as you will end up trusting the false signals while being blinded by greed and toxic optimism. So, always apply logic before jumping into a trade.

6. Build Discipline and Develop Patience

The last but most important thing that you have to do for detecting false signals is trading with a disciplined approach and that has to be developed by practising patience. Consistent efforts will always lead to success sooner or later. Those who are desperate for wins and lack patience will make sudden decisions and don’t even think about the possibility of a signal being false.

Hence, the last tip to recognise false forex signals is to take your time to confirm it and wait until you get an accurate signal. You should not take an action that is triggered by FOMO and focus on finding the right opportunities.

Bottom Line

The false signals make the trading process more challenging for a beginner who lacks the experience and expertise to identify them. But you can overcome this challenge by indulging in continuous learning and sharpening your analytical skills through practice.