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How Market Noise Affects Trading

Recognizing Market Noise

While it is critical for forex traders to be able to leverage the news, they also need to understand how to filter out the noise. Merely having access to various news sources is not sufficient. Traders must know how to differentiate between the useful bits and the noise.

Recognizing and filtering out the market noise can really help them in ensuring that they are focused on the right elements of the market. This can also enable them to minimize their trading risk and maximize their earnings.
This article looks at the different aspects of market noise and assesses how it impacts trading.

Speculative trading

Unfortunately, market noise is present all over the world. Such noise can typically include false ideas, planted articles, as well as incomplete analysis of the news. This noise is part of the inefficiencies of the trading market, and cannot be eliminated completely.

Nevertheless, forex traders can certainly pick and choose the news that they want to focus on. Although this is not a straightforward task by any means, traders can try to make sure that their energy is focused on the right things.

One of the primary reasons why such market noise exists in the first place is because of speculative trading. There are traders out there who like to synthesize such noise and make big bets about a particular financial instrument.

However, such speculative trading can prove to be extremely dangerous and wipe out investor wealth. Therefore, retail traders must be aware of the role played by market noise in the context of speculative trading.

Non-Speculative Trading

Another important aspect that needs the attention of traders is non-speculative trading.
Market noise can also have an influence on non-speculative traders. These traders typically rely on an investing model that is based on the identification of trends. Non-speculative traders attempt to recognize these trends ahead of the others so that they can time the market in a better manner.

Non-speculative traders can be swayed by market noise that is completely untrue. Such noise can result in extremely risky and ill-timed investments that could result in major losses.

Therefore, even non-speculative traders who follow an organized method of investing need to be careful about market noise. If they learn to differentiate the noise from the useful information, they can protect their investments better.

Exiting At The Right Moment

There are also traders out there who focus on entering and exiting the market at the right time.

Every trader who enters into a transaction has to plan ahead in terms of exiting the investment at the right time. This is due to the fact that no particular trend is likely to last for a lifetime. Asset prices can rise up for a consistent period of time, but they are bound to fall after a certain point.

Traders who rely on a timely exit need to be wary of market noise. Such noise can influence their ability to time their exit and result in a major loss. Quite often, incomplete analysis pieces can result in traders being misled into a selloff. Such a selloff can prove to be damaging for their overall portfolio.

Therefore, it is critical that traders remain careful about the market news that they are choosing to read. Several top brokers out there in the market provide specialized news feeds which ensure that you only access top quality information about the market. Others offer tools such as point and figure charting, allowing users to time the market right.

Predicting Returns

Making predictions about your potential returns on each and every trade is almost impossible for traders. This is because all markets are inherently volatile and depend upon a wide range of micro and macro factors. 

You cannot really predict how each transaction will fare in the long run. Market noise can also have a negative influence on your ability to predict returns. You may read a piece of information and base your investment decision on it. However, if the news is not true, it could backfire for you.

In order to overcome this issue, certain brokers offer advanced tools such as the Average True Range Indicator. Such tools enable traders to estimate the actual range in which the stock is likely to trade. 

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