Confirmation is an important concept in daily trading. Refers to a situation where traders use technical indicators or other price action techniques to confirm the movements of an asset. This confirmation can be breakouts, reversals, and continuations.
In this article, we will look at some of the best techniques for confirming signals in trading.
Definition of trading confirmation
Confirmation in trading is defined as: The process in which you check for a particular signal In the market. For example, when trading breakouts, you will need to validate them before entering a trade. The same situation occurs when you are trading reversals and continuation patterns.
in most cases, This confirmation What is Separates between professional and novice or wannabe merchants.
Confirmation can be done in the form of technical indicators Such as the moving average and the relative strength index (RSI). In other cases, it may be in the form of How does the chart behave? After a big move. It can also be in the form of candlestick patterns.
Related “ Checklist: what to do before taking a trade
What are confirmation signals and why do traders use them?
The confirmation signal is a tool It helps traders to confirm certain movements in the market. these patterns Do not guarantee That the asset will trade in the direction of the breakout. Instead, they provide a high probability that the asset will move in the direction of the bias.
For example, if a stock or commodity makes a hammer pattern, it usually is It means that there will be an upward breach. However, since this can be a false hack signal, then Need to confirm the situation before opening a deal.
A good example of this happened in the cryptocurrency market in February 2023. At that time, Bitcoin made a An upward breakout above $25,000 resistance level. It has struggled to move above that level for a while.
So, since this was a breakout, traders needed confirmation before they went higher. Since this confirmation was not present, the The currency fell And it moved to just under $23,000.
Confirmation signals are not always perfect and You should not use it alone. Sometimes, it is important that you use it in combination with your trading strategy and other features and tools as well.
The most important indicators to confirm trades
There are hundreds of technical traders that you can use to confirm a trade. These are, in our opinion, some of the best pointers you can use to get the job done.
Moving averages They are popular indicators used by traders of all assets, including stocks and commodities. There are many types of averages, including:
- Weighted size
pointers. You can use these indicators to confirm trends, reversals, or breakouts in various ways.
A common technique is the use of the death cross or the golden cross. A golden cross occurs When the 200-day and 50-day moving averages are made bullish Crossing.
As such, instead of buying an asset when it moves above the 50-day moving average, you can wait for confirmation to happen when it moves above the 200-day moving average. A good example is in the BTC chart below.
Relative Strength Index (RSI)
the relative strength index (RSI) is one of the most used confirmation signals in the market. It is a technical indicator mostly used to identify overbought and oversold levels in the market. It is also used in trend-following trading.
So, if you are using trend indicators like moving average and Bollinger Bands, you can use RSI to confirm the breakout or trend.
The Moving Average Convergence and Divergence (MACD) is an indicator of this Converts moving averages into an oscillator. It consists of two lines: a fast and slow average, and a histogram.
There are many ways to use the MACD to confirm a trade. For example, if an asset is going up, you can execute a buy trade when the MACD line moves above the neutral point.
Size is an important indicator You can easily use them to confirm trends. In fact, most people use the general volume indicator to confirm a trade.
Others use volume indicators such as accumulation and distribution and the Money Flow Index (MFI) to confirm a trade. These indicators are necessary to confirm the breakouts When using trend indicators such as moving averages and volume-weighted average price.
Rest and re-test
Rest and re-test not an indicator. But based on our past experience, it is It is one of the easiest ways to confirm trends In the market. The good thing is that it works on most chart patterns, including triangles, double tops, and double bottoms.
The idea is simple. In most periods, when Stock Makes an upward breakout above a triangle or double top will mostly Retest support or resistance Then the breakout trend resumed. A good example of this is shown in the chart below.
Risks of using confirmation signals
there several risks When using confirmation signals. Firstly, Some indicators and price action tool can lead to false signals.
For example, in many periods, buying an asset because the Relative Strength Index (RSI) has moved to an oversold level can be a wrong indicator. Therefore, you should always Uses These affirmations Well warned.
second, You can miss out on some good deals And you are waiting for confirmation. A good example of this is death and gold crosses. Possibly, the asset could move above the 50-day moving average. It could take longer before it moves into the 200 day confirmation area than the moving average.
Related “ How to manage FOMO
Third, there is a file The risk of over-trading When there are too many trading confirmations on a given day. Finally, waiting for confirmation may take some time.
When to avoid affirmations
We always recommend that traders always avoid market confirmations. This means that you should Do not use a single indicator or technical chart to make decisions. You should always confirm the thesis before you trade with it.
but, there several Periods when affirmations should be avoided or used sparingly.
Firstly, sometimes some technical indicators don’t work well when there are big events like profits And Economic data release. In these periods, you should use your experience to know how to allocate money.
Second, in most cases, you should use these confirmation indicators sparingly When using short-term charts Like a minute or two. Moreover, you should use it when there is a huge volatility in the market.
In this article, we looked at how to confirm trends and market movements. We also evaluated some of the most important technical indicators to use when confirming breakouts and reversals. Using these tools will help you a lot.