Confirmation on a Chart: Meaning and How It Works

Buying shares during a dicey situation psychologically impacts your decisions. A trader has to follow some important rules and one of them is to be conservative about the trades. A conservative trader tends to wait for the confirmation in a chart pattern which assures them of a certain move in the security prices. How does the confirmation work in a chart pattern?  Deep dive into this blog to know the benefits of working with confirmation on the charts.  

What do you mean by confirmation in the chart pattern?

Confirmation is a way to technically analyze the price movements in a security which substantiates a trend while predicting its future actions. As the move in an asset is never consistent and reliable which requires traders to feel secure and confident and hence they receive signals from confirmation.A confirmation is required to execute trade successfully as it helps traders to confirm certain moves in a security or the market.

How to identify confirmation signals?

Confirmation signals are analyzed by using several other technical indicators like moving averages, volume indicators and relative strength index.

Indicator Confirmation

Moving Averages: It is one popular indicator that confirms the trend, reversals, or breakouts in several methods. When combined with the demand zone, trend breakout or reversal is confirmed.

Exponential and simple moving average are the commonly used moving average indicators that form a pattern of death or golden crossover to signify the bearish or bullish reversal in the security respectively.

Relative Strength Index: A confirmation in the security can be received from the relative strength index as it helps to identify overbought and oversold levels in the market.

Volume Indicator: Volume indicator confirms the trend of a trade as it signifies an increased or decreased volume in the asset. It is essential for traders to consider volume while confirming breakouts as well as use trend indicators such as moving average and the volume weighted average price.

Trend Line Analysis: Confirmation on the pattern is received from trend lines as they help to validate trends and contribute to recognize significant highs and lows on the chart pattern. The trend line formation confirms the potential trend reversal or the continuation of existing trend in the security prices.

Price Action Confirmation

A confirmation is received by a trader through price action when the stock breaks above a resistance level and closes above that level waiting for an increased volume to confirm a genuine breakout in the pattern.

As per the demand in supply theory, a trader seeks to achieve the confirmation from the daily time frame when the demand zones continuously try to breach the supply zones. When the demand zones are able to breach at least two supply zones, it makes the traders sure about a bullish reversal in the security.

Importance of Confirmation Signals

In trading when performed with technical analysis it becomes essential to consider the element of confirmation as it is an additional evidence of the decision making process. A confirmation trade allows and validates the potential outcome of a pattern. Trading without confirmation on a pattern with just a breakout can be very risky as it can turn into a false breakout or might reverse in an opposite direction. Let us know why confirmation is important in technical chart patterns.

Increased Reliability

The sole purpose of a confirmation signal is to act as a filter and increase the reliability of a chart pattern to move in the desired direction. For example, let us once consider an inverse head and shoulder bullish pattern which gives a confirmation signal during a breakout with a significant surge in trading volume.

Reduced False Breakouts

Confirmation trades are essential as it reduces false breakouts in the pattern which is the common occurrence in the financial markets. Getting confirmation on a trade minimizes the risks of false breakouts and leading traders towards a trap. In a breakout situation you must consider getting confirmation through indicators and price action to increase the probability of a favorable move in the price direction and avoid false breakouts.

Pitfalls of Confirmation Indicator

Confirmation provides valuable insights to make informed decisions while increasing trader’s confidence towards tool indicators. However, there are several pitfalls that need to be taken care of as a trade for more in depth knowledge about a confirmation trade.

Lagging Nature

Confirmation indicators are lagging in nature as they react to the price movements that have already occurred in the charts. It is one of the drawbacks of confirmation indicators that they do not provide real time signals to enter or exit the positions.

Over Reliance

One of the drawbacks of confirmation is that traders sometimes become over reliant on confirmation indicators. Trading solely based on confirmation indicators can be quite disastrous as it is just a piece of the puzzle, various other indicators and factors must be considered as well.

False Signals

Confirmation indicators can generate false signals or whipsaws as the market might move in an opposite direction due to some uncertainties. To avoid these kinds of risks, a trader should focus on mitigating the impacts of false signals.

The Bottom Line

As we have discussed above, a trader requires confirmation to predict the future price movements in a security. A confirmation entry through the demand and supply zones ensures that the price moves in the favorable direction.

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