Noise Stock Trading: The Rational Market Ruined

Noise stock trading: The market is full of different types of traders. Each trader type forms a community and moves in one particular direction. But, they hate the other types, which move against them. However, there is one type which largely influences the market, and they do not even are professionals. Neither they have skills nor knowledge, but still, they move the market.

Every other professional and rational trader hates them. In this article, we will discuss these Noob but influential traders. People call them noise traders. We will gradually move in this article and end it with a conclusive post. 

Noise

Noise is the activity in stock market trading that confuses or misinterprets the investors. The ‘Noise’ can be seen on the price charts in the form of corrections and fluctuations. This volatility in the table deviate the overall trend and challenging the traders to identify the market directions. 

Noise Traders

These are the novice traders who make entirely illogical and irrational stock market trading decisions. They do not research and study the assets and make their moves with inaccurate or incomplete information. They make buying and selling decision on factors, they think are helpful, but will get them very little or no profit. 

Nowadays, they “Noob” noise traders form a very significant part of the online stock trading market and have the potential to change the price direction of any asset. They do neither fundamental nor technical analysis of a company and usually overreact to news, events, hypes, and rumours. 

However, these types of traders are short term and don’t influence the price for long term investors. The day traders need to be wary of them as their high trading capital volume, without thinking, can eat up their profits.

Also, these are the people who oversell or over-purchase an asset. 

Noise Stock Market Trading Risk

It is the risk associated with the investment made that might get affected by noise traders. The number of noise traders is increasing day-by-day. These undisciplined and emotional traders usually trade small-cap stocks. However, nowadays, their presence can be felt in medium and large-cap stocks.

The negative consequence of these emotional traders is noise trading risk. They do not take any professional advice from anyone and have inner fear and greed both. 

Let’s understand this with an example:

As a rational day trader, you buy the share of XYZ Ltd. at $10, hoping it to rise. You know, after proper research analysis, that the support price, i.e. the lowest price, of XYZ can hit $9.50. But, due to negative news coverage about the company’s internal conflict, the price went to $8, and you lost. This downfall was due to none other than noise traders, and the thing which happened with you is noise trader’s risk.

 

The Bottom Line

A smart trader is not one who does his homework and invests. He is the one who takes in everyone’s point of view in their mind and then makes the decision. In the above example, a smart trader would have known that the XYZ Ltd. share price is undervalued at $8 and will rise significantly. Thus, purchasing them at this price instead of $10!

The substantial rise in the number of noise traders is due to so many inexpensive and accessible stock market trading platforms. Moreover, more than 50% of users in the online stock trading market are novice traders who don’t have any prior professional knowledge.

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