All traders are familiar with the concept of false signals, perhaps more intimately than
they wish to admit. This undesirable phenomenon involves the following sequence of
events: (1) a buy or sell signal is generated by some mechanical means, (2) the trader
enters the market at the designated price level, and (3) a breakout in the opposite direction
occurs. False signals have also been labeled failures. Regardless of the nomenclature,
they can be very disheartening and costly.
Although the effect of false signals can never be completely eliminated, their detrimental
impact can be significantly reduced by the use of confirming signals and the
proper positioning of stop-loss limit orders.
