Understanding Noise Trading
In this age when market behaviour and the overall dynamics are ruled by the various parameters depending on information, the quality of information must be maintained at all times. In a dynamic stock market like ours, quality of information is a very important parameter that decides the overall elements of the market and as such, it is imperative that reliable sources of information are encouraged and the non-credible ones are discouraged. One such non-credible and rather erratic information and trader behaviour is the one that is referred to as noise trading. Noise trading is generally a term given to the type of trading that is done by a particular segment of traders through inaccurate means. In noise trading, some traders purchase and sell off stocks without any thought and any specified procedures or even projections. Noise trading is done purely on an instinct basis and without any solid thought to the implications of the deals. Tradebulls always discourages such type of inaccurate and baseless trading strategies.
To understand the impact of noise trading on market stock prices and the profit margins of responsible traders, consider the following example:
Mitansh has been associated with stock trading since three years. A qualified analyst himself, Mitansh had been regularly engaging in intraday trading with diverse stock options. However, in the already strife-ridden market of day trading, where noise trading forms a part, stock prices of certain stocks were impacted by the irresponsible trading deals carried out by a few traders often. Throughout the next one and a half years, Mitansh kept on incurring losses and at times gaining limited profits. This impacted his market credibility and his overall profit range fell drastically until he had to sell off the stocks that he had engaged in day trading and went over to commodity stocks in the traditional manner.
Impact of Noise Trading
This example shows how erratic and irresponsible noise trading can impact stock prices, driving trends which are erroneous and not based on any factual strategizing. The impact of noise trading can further be understood in the following points:
- Although a bulk of traders behave responsibly and trade as per the specified norms, yet sometimes, even a minor hassle in the shape of noise trading can impact stock prices rapidly, causing them to either dwindle or to increase beyond a measure. This has the potential of directing negative trends in the market as a whole.
- Since noise trading is done on a purely rhetorical and rumour based activities, the noise traders may create fluctuations in the whole stock situation, leading to a further discouragement and discontent in the general market spheres.
- Noise trading is generally done by those who have no professional or core history of trading and this is an example of negative trading.
- Due to noise trading, the inflation factor may boom up during a down surge in the stock situation, preventing the sale and purchase of credible stock options.
At Tradebulls, trends are forecast based on technological market derivatives so that traders can take up decent stock and securities options for trading. The impact of noise trading is also analysed and traders and investors are advised accordingly.