How do experienced traders identify false signals in the market?

Experienced traders often use multiple technical indicators and theories for market analysis to develop trading strategies. The key element of technical analysis is the identification of signals. Sometimes, due to timing lags, data corruption or smoothing methods applied to certain indicators can cause these false signals. To identify false signals and avoid trading on them, experienced traders try to eliminate as much noise from the market data as possible.

Removing noise from a chart helps traders better identify true elements of a trend. One way traders do this is by averaging candlesticks on a chart. Using only the averages eliminates the intraday fluctuations and short-lived trend changes, creating a clearer image of the overall trend. Other charting methods seek to display only actual trend-changing moves, ignoring all other price data. One such chart is the Renko chart, which accounts for price changes but not time or volume. Canceling all noise, in this case, time, can make applying other indicators for confirmation difficult.

A better noise-canceling charting method is the Heikin-Ashi chart; it turns simple candlestick charts into those with easy-to-spot trends and changes. Since it still incorporates time, other indicators such as the directional movement index, or DMI, and relative strength index, or RSI, can be applied. By using multiple indicators and charts that cancel out noise, traders more effectively spot true signals. When a trader applies multiple indicators to a standard chart and receives one signal from an indicator while the others do not give a signal, the trader can confirm the false identity of the signal by looking to a noise-canceling chart.