What is 'Confirmation'

Confirmation refers to 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 often feels 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.

BREAKING DOWN 'Confirmation'

Confirmation can also refer to a broker's written acknowledgment that they have completed a trade. These can be in electronic or paper form, and record information such as the date, price, commission, fees and settlement terms of the trade. Brokers typically send a confirmation within one week of the trade's completion.

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 are 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 (ATR). Volume indicators include the Chaikin Oscillator (also used to measure momentum), on-balance volume (OBV) and the volume rate of change. (To learn more, see: How do Traders Identify Confirmation of Prices on a Chart?)

Confirmation Example

Suppose a trader notices a golden cross, which occurs when the 50-day moving average, crosses above the 200-day moving average. This is a signal to buy the stock, based on a trend indicator (the moving averages). Because this signal alone does not guarantee higher prices, 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 volumes might make the trader reconsider taking a position in the stock. The OBV indicator would, therefore, be a logical choice to confirm the trade: 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. 

Image depicting an example of trade confirmation.

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 always send conflicting messages to some extent, but traders should take care not to discount mixed signals.

RELATED TERMS
  1. Signal Line

    Signal lines are used in technical indicators, especially oscillators, ...
  2. Confirmation On A Chart

    Confirmation on a chart is the term used to describe a chart ...
  3. Confirmation Bias

    Confirmation bias suggests that investors seek out information ...
  4. Positive Confirmation

    Positive confirmation is an auditing inquiry concerning the accuracy ...
  5. Buy Signal

    A buy signal is an event or condition that alerts a person to ...
  6. Divergence

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

    Trend Trading: The 4 Most Common Indicators

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

    Using Technical Indicators to Develop Trading Strategies

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

    What the Market Open Tells You

    The first few moments of trading provide a lot of information that can give insight into the market's moves for the day.
  4. Trading

    Exploring Oscillators and Indicators

    Find out how to use these technical analysis building blocks.
  5. 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.
  6. Trading

    Measuring Stock Market Sentiment With Extreme Indicators

    Pay attention to how the exhaustion principle helps technical indicators signal trend reversals when abrupt value changes coincide with high trading volume.
  7. Investing

    Intermarket Analysis: Pinpointing Reversals And Confirming Trends

    Learn how to confirm your analysis based on intermarket trends by watching global markets and particular stocks to pinpoint reversals.
RELATED FAQS
  1. What are the best technical indicators that complement the Relative Strength Index ...

    Learn some of the best additional technical indicators that can be used along with the relative strength index to anticipate ... Read Answer >>
  2. What are the best technical indicators to complement the Stochastic Oscillator?

    Explore the function of the stochastic oscillator indicator, and discover other technical indicators traders use to complement ... Read Answer >>
  3. How do experienced traders identify false signals in the market?

    Learn how traders identify false signals in the market when using indicators and strategies to better identify true market ... Read Answer >>
  4. What technical tools can I use to measure momentum?

    One of the main goals of every trader using technical analysis is to measure the strength of an asset's momentum and the ... Read Answer >>
  5. How do I use Stochastic Oscillator to create a forex trading strategy?

    Learn about the stochastic oscillator and how to it is used to create an effective forex trade strategy, including how to ... Read Answer >>
  6. What is the difference between a Golden Cross and a Death Cross Pattern?

    Learn the difference between the golden cross and the death cross, both of which are considered important technical indicators ... Read Answer >>
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center