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Quieting Market Noise

Quieting Market Noise

2011-05-31 21:32:00
Richard Krivo, Trading Instructor
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Student’s Question:I have heard the expression Market Noise but do not know what it means. Thanks!Instructor’s Response:Market Noise simply refers to the random price action that occurs over the course of the day. It is the normal “inhaling and exhaling” of the currency pairs as the market ebbs and flows and price action fluctuates throughout the trading day.

The “noise” can be much more pronounced on the lower time frame charts. Since price action is measured over a shorter period on a 5 minute candle, the price swings can appear more exaggerated. This is one reason why trading on those lower time frames can be more challenging.Take a look at the 5 minute chart below and note the abundance of elongated wicks on either end of most candle bodies. During volatile market activity, the wicks will become more elongated as they reflect the more volatile price action.

Quieting_Market_Noise_body_chart_5_31_11.png, Quieting Market Noise

Each 5 minute candle reflects all the trades that were made during that 5 minute period. Since the time frame is so short, oftentimes, discernable trading patterns can be more difficult to identify. Because of that, identifying entries along with the placement of stops and limits can be more difficult. As a trader moves to larger and larger time frames, the price action will be less random, more smooth as it were and, therefore, Market Noise will become less and less of a factor.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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