The massive moves in oil in the past days made me wonder why loads of people sit and stare at the multitude of indicators on their screen all day. If you look a bit further back you will see oil has been moving for a couple of weeks, quite significantly. If you search in Google you will notice that there were stories about ISIS and Iraq and the impeding crisis around the same time. Suddenly, you have a neural trading system, which would normally cost, you an arm and a leg. But this kind of trading based on noise is age old. Even Edwin Leferve read the ticker and made quick trading decisions based on it in the 1920's
There are all sorts of labels for Traders based on what time-frame and system they use to trade. Everyone has heard of the swing trader and day trader or position trader. In my many searches on the web I discovered a label for a trader I had never seen before. Noise Trader. Actually, it was coined in a report written by Andrei Shleifer and the famous Lawrence H Summer titled “The Noise Trader Approach to Finance” . Link at the bottom of the page for your information.
Many of you think I am mad to think that a 21-year-old document has any relevance to modern-day trading. I agree its all pretty boring until you get to page 28 and positive feedback trading. “The key to success, says Soros, was not to counter the irrational wave of enthusiasm, about conglomerates, but rather to ride this wave for a while and sell out much later.” It goes on to say that this could lead to a bubble but can make you very rich in the short-term. Even back then they were scared of the noise traders as they suggest taxing them to the hilt. Well 20 years later and after a series of bubbles nothing much has really changed.
I guess that means all great traders are noise traders. Now to me that makes perfect sense. The false prophets and market Gurus that peddle indicators and mechanical systems inherently dismiss the one real mover of markets, Sentiment. Yes, some people say much of this is built into the market and I totally agree, if you are a high frequency trader, but most of us are not. For them lagging means a millisecond for us it could be hours or days. It is not bad if you want to make a few great trades, but to be a real trader you need consistency. That means trading well, most days for years. The only way to do that is to follow the successfull crowd, and follow it as perfectly, as you can.
So the question comes down to how one measures noise and sentiment in the markets. Most of trading these days is done by machines and even in dark pools where there is no transparency. The few indicators for momentum are based on the price anyway and are pretty much useless. A friend was following sentiment based on his Twitter posts. That is not a bad idea but its a bit like standing outside a football stadium and predicting the results based on the crowd cheering. You will get it right sometimes but you would be blind, literally.
The answer to all this is very much in built in the strategy. There are a host of analogies traders use, riding the wave, jumping on the bandwagon,and buy low, sell high. The implication for these statements is a fundamental shift in a market, towards a certain direction. Too many traders, these days want to know the whys and the how's. None of that is relevant.
The real questions are ”is the market moving ?” and “why aren’t you in it ?”
The Noise Trader Approach to Finance
http://scholar.harvard.edu/shleifer/files/noise_trader_approach_finance.pdf
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