False Signal

What is ‘False Signal’

In technical analysis, a false signal refers to an indication of future price movements which gives an inaccurate picture of the economic reality. False signals may arise due to a number of factors, including timing lags, irregularities in data sources, smoothing methods or even the algorithm by which the indicator is calculated.

Explaining ‘False Signal’

It is important for technicians to have a thorough understanding of the technical indicators they are using so that they are better able to detect false signals when they arise. Also, many technicians prefer to use a mix of technical indicators to function as a checking mechanism. Since trading on false signals can be extremely costly, trades are only placed when there is a consensus of technical indicators showing a future price movement.

Further Reading

  • Credible economic liberalizations and overborrowing – www.jstor.org [PDF]
  • False (and missed) discoveries in financial economics – onlinelibrary.wiley.com [PDF]
  • Repurchase announcements, lies and false signals – link.springer.com [PDF]
  • False signals from stock repurchase announcements: evidence from earnings management and analysts' forecast revisions – papers.ssrn.com [PDF]
  • Do false financial statements distort peer firms' decisions? – meridian.allenpress.com [PDF]
  • The determination of financial structure: the incentive-signalling approach – www.jstor.org [PDF]
  • Insider ownership and signals: Evidence from dividend initiation announcement effects – www.jstor.org [PDF]
  • Macro-financial vulnerabilities and future financial stress-Assessing systemic risks and predicting systemic events – papers.ssrn.com [PDF]
  • Stock splits and false signaling cost within a management reputation framework – clutejournals.com [PDF]