“False Indicator Signals and Position Risk

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

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<Last updated 10.01.2021>

Dear reader,

Hi! If you are interested in online trading, you should think carefully before you trade and take into consideration the below article where I explain how to avoid false indicator signals and how to increase the probability of having profitable trades.

 

Intraday Trading and Data Analysis


Intraday trading is a style followed by many traders who want to avoid too much exposure to the market, rollover costs, and take advantage of the market volatility that occurs during the day for short profits. However, intraday trading is quite challenging. It needs careful examination of key indicators and gathering of the right information to make informed and logical decisions about how where and when to invest.

Technical analysis tools are often used wrongly by the majority of traders and placing trades based on false analysis becomes more and more common.

Intraday trader’s chart should be set with timeframe: 5m, 15m or 30m. When the spread is high there is no sense to use the 5m or even the 15m chart. In addition, always use the period separators so when analyzing the chart you get the right sense of timing. For example, below, we are looking at a 1-day pricing.

It is quite important to have a sense of time since important news announcements are released during the day.

No matter the technical analysis we conduct, reaction to the news, and market direction is totally unpredictable. It might be the case that our indicator signals an overbought case, failing to take into account the information of reports releasing involves high risk.

 

Indicators and News Announcements


In the below case, PMIs for Europe were released around 10:15, 10:30. It is clear that the price first moves downwards and then it jumps rapidly. Depending on the figures and people’s expectations the price will deviate, but with great uncertainty.

In the below case, it is clear that the two leading indicators show the signal of an oversold case before the release which is shown by a vertical yellow line.

The price moved rapidly upward but then immediately changed direction to a big fall. Thus, omitting the news reports is quite risky.

Indicator Settings


The relative strength index (RSI) is a momentum oscillator that measures the magnitude of recent price changes. Oscillates between zero and 100.

RSI is considered overbought when above 70 and oversold when below 30 traditional levels. During strong trends, the RSI may remain in overbought or oversold for extended periods. Strong signals can be generated by looking for divergences.

The RSI should be set for 14 periods when trading intraday. Any analysis should be done on the same chart 15m for that day.

 

If you are using 30m or higher then analysis can be done in 2 days or more. In this case, the RSI moves with an upward trend while prices move downwards. Then price moves upward to get out of the oversold territory of level 30 (Divergence).

 

Oversold Signal and Entry


In the below case, the RSI shows an oversold case since it crossed level 30.

You have to take into consideration that there was an intraday downward trend if you are considering to buy. We will see later on how that can be an issue.

 

You also have to take into account the time of the day. With no scheduled news announcements and no significant news a retracement is more probable.

The Fibonacci expansion helps us in identifying the 61.8% level. Our Stop Loss is very near while Take Profit even further (red lines).

The whole purpose of using an indicator is to increase the probability of a winning trade. This means to correctly speculate the direction of the price move. In addition, The Fibonacci levels can also add value by showing us the potential Take Profit Level at which we will close the position. The potential loss is less than the potential profit from this trade.

Trends and Exit


In this case, RSI reached the 70 level which signals that the market is overbought expecting a retracement downwards.

However, when there are trends, price moves might stop unexpectedly. The previous resistance becomes support. This must be taken into account when calculating risks and benefits setting the Stop Loss.

False Signal


The RSI crossovers are counter-trend entries looking for near-term retracements. These do not always happen, resulting in relying on false signals.

To increase the probability of a successful win trade, we need to combine indicators. You can see already that we are using the 14 period MA showing that there is an upward trend.

 

Countering False Signals


It seems that when choosing the Entry with RSI you have to take into consideration the trending market and enter when the price move crosses the MA.

To further increase our probabilities of a successful trade, we will use two more oscillators. The CCI and Stochastic indicators.

The 30m Chart shows how the price move crossed the MA and entering into overbought territory. The RSI crossed the 70 level.

The Stochastic shows also an overbought signal and the same for the CCI. However, look at how the CCI is leading the price. It reaches a peak and then it falls even before the price move.

When the CCI crosses below 100 level, the price move just starts to have a downward move, that’s your Entry.

 

Indicators and Exit


We already discussed how the Fibonacci tools can help in identifying the levels for exit the trade. For example, the 61% retracement level.

These leading indicators are also showing when to exit when retracement did not happen, thus limiting your losses. CCI is the best one. It shows immediately the fall in momentum. Price move is still in range, that’s your Exit.

 


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.
Risk Warning: Trading in Forex and Contracts for Difference (CFDs), which are leveraged products involves substantial risk of loss as there is considerable exposure to risk in any off-exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of the markets that you are trading. You should carefully consider your investment objectives, level of experience and risk appetite before making a decision to trade with us. Most importantly, do not invest money you cannot afford to lose. It is possible to lose all the initial capital invested.

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