Tuning Out Market Noise

May 14, 2013

One thing that every trader needs to get used to in Forex, is how to deal with market noise. How you deal with this can be the difference between organised, mindful trading and over complicated analysis. Market noise is something that can make the process much more difficult than it needs to be. It’s not something you can physically turn down, like a TV or stereo.

It is something that gets louder the shorter the chart time-period you are looking at and that essentially refers to the constant price fluctuations in the market. This noise can be very misleading, when you are trying to identify the trend, or optimise entry and exit points for a trade. If you want to be a successful trader, you have to learn how to tune out the noise and get to the heart of what the market is trying to say.

Using the Right Charts

One of the best things that you can do to eliminate market noise is to use the right types of charts. When you look at a regular bar or candlestick chart, you will probably see the market price jumping up and down. Again, the lower the time scale of the chart, the more jumpy or somewhat erratic this can be. This can make it very difficult to identify where the pattern is headed throughout the course of a trading day.

It can be a great idea to use multiple time frames to help dampen this market noise. A collaboration of three charts appears to be very beneficial. A short, medium and long range chart which will of course vary in length depending on the priority of your trading style. A scalper for example, will likely use a combination that looks more like, 10 sec, 5 min, 1 hour, whereas a trend trader may utilise a combination of, 4 hour, daily and weekly charts.

**Click image to enlarge. 30 second charts on MahiFX used for short-term trading (Scalping)

The idea is to have a short-term, medium-term and long-term chart each with a particular focus. The long-term chart provides you with the overall dominant trend, the medium to identify smaller moves within the broader trend, and the short term for executing your trades where optimal entry and exit points can be identified amongst the smaller fluctuations in price. Getting the time frames right for your trading style is critical to the success of this system.

Using Indicators

Besides using the right charts, there are also a series of indicators that you can use to minimize the impact of noise on your trading. With these indicators, you can verify the strength of the market in one direction or the other, which is helpful in identifying the trend.
One of the most commonly used indicators in this regard is the Directional Movement System, which incorporates three lines, one for each the positive and negative Direction Indicators and one for the ADX, which stands for average directional movement index. This particular indicator is good for identifying if a market is trending or falling into a range.

There are many indicators to learn and to choose from but it is important not to get carried away with these. An indicator provides exactly that, an indication and like an ink blot, this is tangible and open to interpretation. Using too many indicators at one time can also turn up the noise, over analysing and complicating your data. If you choose to use indicators, while it is good to know what they all do, stick to only using one or two at a time for any analysis.

Considerations

While it may be an impossible task to completely rid the charts of market noise, if you want to create as quiet a trading environment as possible you also have to block out a lot of market sentiment that you pick up in various places. Instead of getting bogged down by other people's opinions about the market, do your own research, and find out which way the market is headed. It is a lot better to trust your own research and indicators, instead of listening to the voices of the other traders in the market.

It’s good to know what others are saying, but this should not be followed blindly like a sheep. It is for example, sometimes beneficial to trade the other way when an influx of trades is expected in one direction. After all, what is your intention in Forex? Is it to follow the crowd in a market where most people don’t turn a profit? Or to stand out from the crowd and be the exception?

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