Among the mistakes of the new traders that never make it to profitability is the fact that they never develop a filter to enable them to see what really matters in the financial markets. Much of what a new trader is exposed to is just pure noise. Noise does not lead to making money, it leads to confusion and frustration. What the new trader must be in search for is signals.
Signals tell you when to buy and when to sell for a profit. Noise tells you nothing but information… and if that information cannot be used to make money in the markets then it is not a signal. While watching television or while you are on social media we must have a keen eye for what matters.
“The instinctual shortcut that we take when we have “too much information” is to engage with it selectively, picking out the parts we like and ignoring the remainder, making allies with those who have made the same choices and enemies of the rest.” – Nate Silver
This is the NOISE:
- Talking heads on television. They could have no position in their picks, they could be pumping their portfolio holding, or talking down their shorts. Who really knows?
- Predictions by anyone are not trading signals. The farther out the predictions are for the more the odds are against the prediction. The complexity of the world and the markets and the randomness of so many moving parts and players make predicting a future that does not exist impossible.
- Known news events are not signals. If there are escalating geo-political risks and the same stories are on the news day after day with no major changes in the situation then that news is already priced in. Continual fear mongering from the media is just noise.
- The shorter the time frame the more random the prices. The farther you zoom out in time the more patterns and trend are identifiable. If you sit in front of your monitor all day the majority of what you see is noise you have to wait until the signal appears inside all that noise.
- Short term trading results tend to be random. Someone with a long bias that holds losing trades until they come back in a bull market looks like a profitable trader with skills. It is the long term results of a trader that signals whether they have skills in system development, discipline, and risk management. Many new traders that get lucky at the beginning and seem to be profitable are shocked when they end up giving back their bull market gains in the next bear market. Their winning streak was just noise in the long term as the market changed.
These are Signals:
- A breakout of a trading range to new highs or new lows in your time frame that holds the new price level.
- An oversold bounce off support or an overbought reversal against resistance in your time frame that is strong enough to convince you it is a high probability trade set up for a swing trade.
- When the market rallies on bad news or sells off on good news that is a signal of a possible end to the markets prevailing trend.
- When popular market sentiment is overwhelming bearish or bullish and there is a strong move against that prevailing sentiment it is a possible signal of a market top or bottom being put in.
- Many times a gap in the direction of the prevailing trend is a signal of a continuation of the trend in the direction of the gap over the long term.
The real point of system back testing and the study of historical price patterns are to find the principles that are present in the markets historical price action. The principles of fear, greed, and ego along with supply and demand are the key underlying causes of trends and range bound markets. The profitable traders are able to search out and find the signals that give them the edge over the traders caught up in trading the noise off their own emotions.
“The signal is the truth. The noise is what distracts us from the truth.” – Nate Silver
The ability to filter out the noise of what does not matter is a skill just as important as finding the signals. The vast majority of traders and investors find themselves lost in the sea of noise. Find the robust signals and incorporate them into a trading plan and then profits will find your trading account.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.