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What Is a False Signal?

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  • Written By: Alex Newth
  • Edited By: Angela B.
  • Last Modified Date: 03 September 2016
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    Conjecture Corporation
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When an estimated price movement made by software or another analytical technique does not follow the real price movement, it is known as a false signal. There are many factors that can cause a false signal to come about, such as incorrect data, poor algorithms or unexpected occurrences. If someone trades based on this information, then it can make the investor lose a lot of money, which is why knowing false signals from true signals is important. To ensure the values are as accurate as possible, analysts normally will use factors to back check the signal, but even this is not always accurate.

There are many ways to analyze and estimate stock market price movements, and many investors go by this information when planning to trade, buy or sell stocks. This information normally is accurate but, when there is a false signal, then the estimate is very off. This can mean the real price is significantly higher or lower than the estimated price. Both can cost investors a lot of money, depending on how they use the false information.

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A false signal normally occurs because of a bunch of different factors. This can be from incorrect data mining, such as the data saying the price will go up when the price really goes down. An unexpected occurrence also can cause prices to rise or decline rapidly, such as a product failing or really taking off. This can make it difficult for analysts to fix this problem and to always have correct estimates.

Going on a false signal can be a terrible mistake, because an investor may end up spending or losing a lot of money. For example, if a stock market analysis states that the price for a share will go down dramatically, then the investor may feel inclined to sell that share to keep from losing money. If, in reality, the price goes up, the investor loses out on making a profit from the now higher-priced share.

While it is not always possible to avoid a false signal, analysts have several things they can do to keep this from happening. When information begins to look inconsistent, analysts often will look into what really is happening in the market to see if the estimate and the real value are concurrent. There also are algorithms and indicators that can be used to balance out the estimate and the real value, which can help avoid a false signal.

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