“Noise”

Used in the context of technical Analysis of stocks and their charts, “noise” signifies stock market activity caused by program trading, dividend payments or other phenomena that is not reflective of overall market sentiment. In this context, it is also known as “market noise.” The concept of noise was formally introduced in a landmark 1986 paper by economist Fischer Black, where he stated that “noise” ought to be distinguished from “information” and that a disproportionate amount of trading occurred on the basis of noise rather than evidence.

The moving average (MA) is a simple technical analysis tool that smooths out price data by creating a constantly updated average price. The average is taken over a specific period of time, like 8 days, 50 days, 30 weeks, or any time period the trader chooses. There are advantages to using a moving average in your trading, as well options on what type of moving average to use. Moving average strategies are also popular and can be tailored to any time frame, suiting both long term investors and short-term traders.

A moving average can help cut down the amount of “noise” on a price chart. Look at the the direction of the moving average to get a basic idea of which way the price is moving. Angled up and price is moving up (or was recently) overall, angled down and price is moving down overall, moving sideways and the price is likely in a range. A candlestick chart alone, especially short term candlestick, like 1 minute or 10 minute, will show a lot of noise. The moving average lines will cut down on that noise.

All trading is somewhat speculative, but noise traders are considered to be particularly reactionary, relying on trending news, apparent surges or declines in prices or word of mouth rather than the fundamental analysis engaged in by more experienced traders. In general, the shorter the time frame, the more difficult it is to separate the meaningful market movements from the noise. The price of a security will vary widely throughout a given day, but almost none of this movement represents a fundamental change in the perceived value of the stock. Some noise traders attempt to take advantage of market noise by entering buy and sell transactions without the use of fundamental data.

If most market fluctuation is noise, however, then most traders are noise traders. Only hindsight provides assurance of the credibility of information, and when buying and selling stocks at a rapid pace, it is difficult to distinguish “information” from “noise.” However, there are some fairly predictable market fluctuations that are known to be unreliable as indicators. It is almost always a bad idea to make trades based on information you’ve received only that day: the price of a security will fluctuate wildly within a day, and much of this price movement is deliberately manipulated by professional traders to manufacture market advantages.

Much of this trading is actually program trading, which means that a large investment institution has programmed computers to make trades when prices reach a certain level. Many of these trades are set for when a price hits a particular moving average or trend line. It’s also advisable to be on the lookout for artificial bubbles, which are often created when many noise traders congregate their purchases around a single company or industry, and for corrections, reverse movements of more than 10% of the value of a stock which occur as adjustments to a significant overvaluation of the security.

Most successful traders have personal standards or processes which they use to make trading decisions. They know how much they’ll risk on a trade and they know, with some precision, what will constitute a wise move for their current position. Me, I like to look at, and digest the “noise” with 1 minute candles, along with numerous moving averages which include the “T line” (8 day MA), the 50 day MA and the 200 day MA.  Generally, people who do not have a process for arriving at a decision are more susceptible to noise trading. Making decisions based on personal standards doesn’t remove susceptibility to misinformation, but traders who know what they’re looking for are far less likely to be swayed by noise than traders who rely on news or other fluctuations.