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.

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.