Forex Strategies: How to Avoid False Signals

There are many strategies for trading in the Forex market. Let’s consider in this article how you can trade using order flow.

Agree that any trader would be happy to anticipate in advance everything that will happen on the market. Help in this can be a very powerful tool – the flow of orders.

Analytical Forex tools, various indicators help us understand in what direction the market moves, and how most traders are set up. However, no one is immune from signals that can lead to a false trail. They must be able to separate from the general flow.

Entrance to the market

Traditionally, traders use different indicators to open positions. Someone uses a trading strategy developed independently; someone gets signals from other traders. In any case, there are several options for entering the market: aggressive and conservative.

Among the aggressive, there are two ways:

  • Entrance at the current market price;
  • Entrance, after the candle has closed.

Aggressive, these methods are called because they carry great risks: the price of a trading position at any time can rebound in the opposite direction. Despite this, the opening of the position, after the candle was closed, is a classic option.

More quiet can be called entering the market when the breakouts of the signal bar, that is, the entrance at the moment when the price broke the maximum or minimum value of the signal candle. This methodology allows you to cut off the maximum number of false positives. Let’s look at the situation in more detail.

It can be seen that the RSI indicator crosses the value 70 from the top down and provides a sell signal. At the same time, the signal candle was closed by a significant decrease. The opening of the transaction at this time may be justified, but it is quite risky. This situation gives only minimal guarantees that the price will continue to decline. Thus, if a sale is opened at this moment, then, as can be seen from the figure, it will lead to a loss.

If you wait until the next candle closes, it becomes obvious that it did not break the minimum signal, therefore, this signal can be considered false. At this point, it becomes clear that the transaction for sale cannot be opened. Only when the second candle strikes at least the signal candle, you can open a position for sale. If it closes below the minimum of the signal candle, then this will be an additional confirmation of the possibility of opening a deal.

Similarly, you should act when you receive a signal to buy, only in this case the second candle should break the maximum of the first.

Disadvantages and peculiarities of the method

  • Of course, this method has its drawbacks. First of all, this is a loss in points by almost the size of the whole candle. Consequently, if the priority in your trading is a scalping strategy, then this method will not be relevant.
  • When using this method, there are several points when it should not be used. So, for example, with a weak volatility of the pair and a general “bearish” attitude, the signal for buying is better not to use. And, conversely, with bullish movement, the signal for sale is also better to ignore.
  • In addition, the method of trading on the flow of orders, like all other methods of trading, is risky. After all, no one is immune from a sharp price change, for example, as a result of the release of some news. But in such situations, it is always possible to set the Stop Loss level.

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