What is Market Noise in trading?

Surely you’ve heard a lot of times talk about that “market noise“, which is something that practically all traders or investors name from time to time.

Why are traders and investors so concerned about this “ethereal” concept as market noise?

Because we know that the market are not a song.

Sure, it’s not music, but traders always see it as if it were a kind of melody that has a certain rhythm and musical patterns.

In such a way that we compare it with that beautiful art that is the music and we denominate “market noise” to those days or moments in which the price has an erratic behaviour

In the same way that you want to avoid dancing the filling songs of some concerts, performances or discos, also, as an investor or trader, you want to avoid negotiating in those moments of “market noise”.

market noise trading
Market noise becomes irrelevant when investing in the long-term

Well, what is that market noise?

Is not all the behaviour of the price of an asset supposed to be relevant?

Yes, it is, but it is also true that the action takes place in a small time slot, and most of it the price is spent quoting in a way, I repeat, erratic, which is not another simpler way to call what which is really “random”.

For most investors or traders the erratic price is one in which the price does not take a definite direction and it goes up and down, with endless attempts to break or very smooth movements, to end up turning around and returning to equilibrium.

Everyone wants to avoid that.

That’s because everyone wants to catch the price when it moves in trend.

However, do not think that taking the trend is so easy; especially in the short term.

Yes, we can take it a lot of times, without a doubt.

The problem is how many times we are going to have to fail to catch those tendencies.

I’m not worth taking a strong movement of 1000 pips in which I earn 500 applying operations in favour of the trend, if before I spent a lot of days trying to catch that tendency to crash into the wall of an asset side market.

The market noise is something that applies especially brutal to short-term trading because in the short-term investment without stop orders and things like that, simply following buy and hold strategies, it will not matter if the market starts zig zags without meaning for months.

Sorry, we care, because we really want our investment to rise like a rocket, but if we are realistic, we must know that markets and assets can spend many years with problematic markets and that long-term rises require a lot of patience.

If we have that patience with a good action for years we can see how the price rises in the end and our investment becomes very profitable.

During all those years of rise, with large corrections in between, we can be sure that there are hundreds, if not thousands of days with a lot of “market noise”, where day traders surely gave themselves to hosts for a few crumbs.

This is where the problem of market noise comes

As we move away from the long term and the stocks that have a tendency – not all of them are like that – we find ourselves with a greater number of occurrences in which the price spends weeks and even months quoting in a way that seems not to he decides to go anywhere.

The thing becomes more complicated.

If we already go to the 5-minute chart, a very typical day trading, we will see that things get much more complicated and we can be sure that the market noise is present the vast majority of days.

Why?

Because even in days when the price moves; we have a lot of “noise” for most part of the day.

That is why it is so difficult to avoid such an obstacle in day trading.

That’s why it’s so difficult to succeed in day trading.

The following graph is from the last Inditex day, with 5-minute candles.

market noise intraday

Do you see what I tell you?

As you can see, the behaviour is totally erratic.

Yes, I am sure that by applying RSIs, MACDs, Momentums, stochastics, CCIs, and many more indicators, we will have a lot of trading opportunities.

But honestly, I think it’s easy to understand that we’re not going to get very far like that.

Market noise in Forex day trading

We can see this issue in the Forex market, where the market noise is even worse, at least in the longer term.

Why?

Because the long-term Forex trends are more erratic, and many of the big pairs like the EURUSD, quote as if it were “market noise” if we look at decades.

Worse is when we get into the Forex day trading, where we even have the dramatic effect of the macroeconomic news.

Sell when overbought
buy when oversold
easy, right?

For example, here we can see the last day of the EURUSD, with 15-minute candles and with a totally erratic market that went up and down and went back up and down again later.

Some will say: no problem. Here what you have to do is look for some indicator that makes me buy when it is oversold and another that makes me buy when it is overbought.

Okay.

Good luck with that.

So what you are doing is trading range and, therefore, not following the trend but betting against it.

Some will believe that that is the key after all.

Sometime later, when the EURUSD has 10 or 20 days almost continuously falling or rising strongly, they will see how their accounts are totally destroyed.

In Forex, in addition, there is another phenomenon, as in all markets, and is that as we can see, not all times of the day offer the same market movements.

If we use a volatility meter such as the ATR indicator, we can see how large movements follow a cyclical pattern in such a way that, for example, in the EURUSD, those stronger movements tend to occur from the opening of the European market to the close of the same, from 4 to 5 in the afternoon.

That can lead us to think that then the rest of the day what we have is noise and it is better to avoid operating there.

I thought that on a lot of occasions too, thinking that this was where I had to operate.

The problem of “there” in the Forex is that we are talking about news trading and that is something that you should not think is going to make you rich.

If not, try demo accounts or microlots and you’ll see what happens to you.

But not only happens in Forex, also in stocks, where, for example, the opening of New York and the closing of the day are the moments where that market moves the most.

Also, in the same way, you can think that then the first hours of opening of Wall Street are the best to operate the future of the SP500.

I do not say no.

It is when more movement occurs.

But the fact that this is so does not mean that most of that movement is noise.

You understand?

The noise, in the intraday, occurs whether it is in the quiet moment or if it is at the moment of news or opening, just when the majority operates, with movements that seem like a crazy house.

Yes, sometimes I get the feeling that the Stock Exchange is a crazy house, especially in these day trading markets.

What’s more, I tell you one thing.

Do you know where the moment with less noise in the Wall Street stock markets occurs?

At night, when the market is closed.

But how is that possible?

Well, anyone who has been operating for many years and seeing the markets knows that the stock market has a holding to rise at night; a quiet climb, of course, but not for worse quality.

The problem with that rise, obviously, is that we cannot operate it with day trading.

It’s what they call “Wall Street likes the day, but loves the night”.

Curious, at least.

How to avoid market noise?

I’m telling you, if you’re doing day trading, really complicated.

We can try to apply filters to only operate certain days, but still things are not easy.

The best way, in reality, is to apply trading that goes beyond day trading, obviously.

Regards and good trading

Original article: El ruido de mercado en trading e inversión

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