To understand the concept of Market Noise we have to understand beforehand that the Trading Process is the fight at all times between the Traders that open a BUY position because they think that the future Trend is going to be Bullish and the Traders that open a position of SELL because they think that the future Trend is going to be bearish. The result of this fight or difference between the Buy Volumes and the Sell Volumes is who determines in the first instance the resulting Trend.
In addition, there are external factors that undoubtedly condition our Decision Process and sometimes make us position ourselves in the Bulls side and other times that we position ourselves in the Bear side.
Bulls and Bears in the Market, has its origin in the form in which these animals attack. Bulls attack from the bottom up, in a bullish manner. On the contrary, the Bears attack from top to bottom, in a bearish manner.
Among the external factors that affect our Decision Process, perhaps the most important is the Manipulation of Information. Manipulation Information has two distinct and complementary meanings. The first meaning refers to the process of data collection, analysis of data, establishment of conclusions, generation of information and disclosure. This means that our analysis and conclusions are not partisan and are based exclusively on data and objective evaluation criteria. However, the reality is quite another and from there the second meaning is born.
The second meaning refers to the application of a series of related techniques with which members of a certain group create an image or an idea that favors their particular interests or those of their clients.
On numerous occasions, a Trader finds that in economic information channels on television or on Internet a promising upward future of a certain Stock is predicted.
However, immediately afterwards usually there is a sharp fall in the value of the Stock and vice versa. Once this happens the media that spread the previous news immediately find hundreds of reasons to explain why the price of the stock has evolved contrary to the information initially provided.
It is clear that the Institutional Investors or Market Makers have no interest in Traders Professionals follow his steps and for this reason they use any tactic that is in their hands to avoid it and obviously are aware that misinformation is equivalent to throw a torpedo at the Flotation Line of the Professional Trader’s Decision Process.
This does not mean that we should not be informed. What this means is that while a data obtained from an Official Publication can not be manipulated, the information on the contrary is susceptible to being manipulated. For this reason, we must be very careful when analyzing the truthfulness and real impact of any information in the Market, since it can very negatively affect our Decision Process.
In short, this struggle between Decision Processes between Bullish Traders and Bearish Traders is what causes and generates Market Noise and is what usually causes many Traders to make mistakes in their Decision Process. Likewise, the Market Noise is responsible for the characteristic shape of the curve in the shape of a sawtooth that represents the Movement of the Price of any Stock in the Market.
DOES THE MARKET NOISE AFFECT OUR TRADING PROCESS?
Undoubtedly Market Noise affects our Decision Process and therefore affects our Trading Process in a negative way as it prevents us from seeing clearly what the future Trend of the movement of any Market Stock may be.
In short, what Market Noise does is to blur reality by camouflaging the Real Tendency so that we cannot correctly discern what it is. Which forces us to take measures to mitigate Market Noise, since what is evident is that it cannot be eliminated 100%.
WHAT MEASURES SHOULD WE TAKE TO MITIGATE THE MARKET NOISE?
Let’s see how and how we should analyze the Price Movement of any Stock in the Market to mitigate the effect of Market Noise:
- i. The Moving Averages reduce and significantly mitigate Market Noise. For this reason, I recommend that you use three (3) Moving Averages of periods fourteen (14), twenty (20) and forty (40) so that when the crossing occurs, we are informed clearly and with maximum probability of the exchange points. of Trend of the Price Movement.
- We must never analyze the Price Movement in a Temporal Framework of one (1) minute or in a Temporal Framework of five (5) minutes to determine the Real Trend.
- We must analyze the Price Movement in a Temporal Framework of one (1) day to determine the Real Trend. For this we will draw the Stock Price Movement Channel and draw the Horizontal Lines of Resistance and Support Levels.
- We will repeat the previous operation in a Temporal Framework of four (4) hours and determine the Trend. If both trends coincide, it means that there is a maximum probability that the Stock price will continue its movement in accordance with the Real Trend. Therefore, we will only open operations based on the Real Trend if our Trading Style is Swing Trading.
- Once the Real Tendency is analyzed, we will determine the Secondary Tendency in the Temporal Framework of one (1) hour. And for this we repeat again the previously defined process. Remember that the Real Tendency and the Secondary Tendency do not have to coincide. Once the Secondary Trend is determined, we will only open operations based on the Secondary Trend if our Trading Style is Scalping.
- Avoid opening operations at times when there is a lot of volatility or at moments close to the publication of Fundamental Stock Data since the reaction of the mass of Traders to a good data or to a bad data is often unpredictable.
Success in the Trading Process is not based on magic formulas, nor on what a Guru or Specialized Media think that will do the price tomorrow. No one knows what the price will do. Our success as Professional Traders is only based on a Strict Discipline and adequate Technical and Psychological Training. Remember to achieve Consistency is not an easy and simple task, it requires a lot of time and effort.
For all this one of the fundamental concepts that we must master to achieve Consistency is precisely to know how to mitigate the effect of Market Noise in the Trading Process and I sincerely hope that the concepts that we have presented in this article serve to improve your Decision Process and ultimately your Trading Process.