Confirmation

What is 'Confirmation'

Confirmation is the use of an additional indicator or indicators to substantiate a trend suggested by one indicator. Since technical indicators are not perfect predictors of future price movements, a trader will often feel more secure deciding to act on a signal if more than one indicator is sending the same signal. If different indicators send conflicting signals, this is known as divergence.

Confirmation can also refer to a broker's written acknowledgment that a trade has been completed. These can be in electronic or paper form, and record information such as the date, price, commission, fees and settlement terms of the trade. They are normally sent within one week of the trade's completion.

BREAKING DOWN 'Confirmation'

Technical indicators fall into four broad categories: trend, momentum, volatility and volume. When seeking confirmation for a trade signal provided by one indicator, it is usually best to look to an indicator from a different category. Otherwise, the same or similar inputs will be counted multiple times, giving the illusion of confirmation when in fact little new information has been taken into account. Trend indicators include moving averages, moving average convergence divergence (MACD) and the parabolic SAR. Momentum indicators include the stochastic oscillator, the commodity channel index (CCI) and the relative strength index (RSI). Volatility indicators include Bollinger Bands, standard deviation and average true range. Volume indicators include the Chaikin Oscillator (also used to measure momentum), on-balance volume (OBV) and the volume rate of change

For example, say a trader who notices a golden cross, which occurs when a short-term trend line, such as a 20-day moving average, crosses a longer-term trend line, such as a 50-day moving average, to the upside. This is a signal to buy the stock, based on trend indicators (the moving averages). Because this signal is not guaranteed to translate into a price rise going forward, the trader might seek confirmation from a different type of indicator. In this case, a high trading volume would reinforce the buy signal, while lower trade volumes might call it into question. The trader could check the OBV: a rising OBV would confirm the golden cross' bullish signal, while a flat or falling OBV would suggest that the price is nearing a top.

Confirmation Bias

When seeking confirmation for a signal, investors should always be wary of confirmation bias, the tendency to set greater store by information that agrees with preconceived notions and to discard information that clashes with those notions. Of course, different sources of information will always send conflicting messages to some extent, but traders should take care not to discount divergent signals. 

RELATED TERMS
  1. Signal Line

    A moving average plotted alongside a technical indicator and ...
  2. Ease Of Movement

    A technical momentum indicator that is used to illustrate the ...
  3. Lagging Indicator

    1. A measurable economic factor that changes after the economy ...
  4. Confirmation On A Chart

    An indicator or chart pattern that provides evidence that the ...
  5. Cumulative Volume Index - CVI

    A momentum indicator that gauges the movement of funds into and ...
  6. Divergence

    When the price of an asset and an indicator, index or other related ...
Related Articles
  1. Trading

    The Four Most Common Indicators in Trend Trading

    Here are the top indicators and tools trend traders use to establish when trends exist and find entry/exit points.
  2. Trading

    Four Commonly Used Indicators In Trend Trading

    No single indicator can punch a ticket to market riches, but here are four that remain popular among trend traders.
  3. Trading

    Exploring Oscillators and Indicators: On-Balance Volume

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com The on-balance volume indicator (OBV) is one of the most well-known technical indicators and it focuses on the importance ...
  4. Trading

    Exploring Oscillators and Indicators: Leading And Lagging Indicators

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com Indicators can be separated into two main types - leading and lagging - both differing in what they show users. Leading ...
  5. Managing Wealth

    The Top Technical Indicators For Commodities Investing

    Traders can use "the usual suspects" (standard indicators for trend trading) when it comes to choosing indicators for investing in commodities. Here's how.
  6. Managing Wealth

    Using Technical Indicators To Develop Trading Strategies

    Unfortunately, there is no perfect investment strategy that will guarantee success, but you can find the indicators and strategies that will work best for your position.
  7. Trading

    Exploring Oscillators and Indicators: Conclusion

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com The goal of every short-term trader is to determine the direction of a given asset's momentum and to attempt to profit from ...
  8. Trading

    What The Market Open Tells You

    The first few moments of trading provide a lot of information. If a trader analyzes this information, it can give a lot of insight into the market's moves for the day.
  9. Trading

    How To Use Volume To Improve Your Trading

    Volume is a simple yet powerful way for traders and investors to increase their profits and minimize risks.
  10. Trading

    How On-Balance Volume Reveals Market Players' Strategy

    On-Balance Volume (OBV) reveals the intent of market players, often before price action generates a buy or sell signal.
RELATED FAQS
  1. What technical indicators can be used to confirm the tendency of a stock?

    Find out what signal confirmation is and some common strategies used to confirm trading signals concerning the tendency of ... Read Answer >>
  2. What are the best technical indicators to complement On-Balance Volume (OBV)?

    Discover why it is important to confirm the price trend signals generated from the on-balance volume indicator and which ... Read Answer >>
  3. What is a common strategy traders implement when using On-Balance Volume (OBV)?

    Read about common trading strategies that are implemented based off of signals generated from the On-Balance Volume momentum ... Read Answer >>
  4. Why is On-Balance Volume (OBV) important for traders and analysts?

    Discover reasons why the on-balance volume momentum indicator has become one of the most widely used and trusted tools of ... Read Answer >>
  5. How do I use On-Balance Volume (OBV) to create a forex trading strategy?

    Read about some of the basic ways On-Balance Volume indicators can be used by forex traders to measure volume trends and ... Read Answer >>
  6. How do traders identify confirmation of prices on a chart?

    Learn about some of the crucial tools that traders can use to confirm their price movements on a chart before entering or ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center