Weekly Insights: Identifying Market “Noise”

Identifying Market Noise


One thing I eventually discovered from covering the same markets day after day, month after month, was that much of the time most of the markets’ overall fundamental and technical situations did not change on a day-to-day basis. Yet I was conditioned to write about why the market went up one day and why the market went down the next day, and so on. Even though a market may have been in a very narrow trading range for days or weeks, I had to ask the traders and analysts every day to produce some fresh fundamental and\or technical reasons why that market moved only a fraction.

The New York soft futures markets (coffee, cocoa, sugar, cotton, and orange juice) are especially difficult.   The soft markets many times just do not have much fresh fundamental news on a daily basis–or sometimes even on a weekly basis, for that matter. Conversely, it is easier to cover the financial and currency markets because usually, at least one government economic report every day will make those markets wiggle a bit. Or some government official will make comments of which those markets took notice.

As time went on and I came to better understand markets and market behavior, and as I studied specific trading strategies, I realized that the day-to-day market “noise” is not of much use to most traders. Here is a specific example of market noise: Recently, the live cattle futures market was up a bit on a Monday due to talk that the cash cattle trade later in the week would be at higher money. On Tuesday, the futures market dropped a bit because of ideas the cash cattle market trade later in the week may not be at firmer money, but steady at best. Nobody was trying to manipulate the live cattle market that week. It was just a case of differing opinions getting center stage when the market closed on different sides of unchanged.

For a trader who tries to follow the near-term fundamentals in a market too closely, hearing that kind of conflicting news can be a nuisance, at least, or a factor that prevents successful trading results, at most. It is not easy for less-experienced traders to ignore the differing daily drumbeat of fundamental news that is reportedly impacting a market.

The lesson here is that prudent traders should not become overly sensitive or reactive to most of the day-to-day fundamental news events that are reported to be moving the market on any given day. What is important for the trader is that he or she recognizes and understands the overall trend of the market and that daily market noise is usually an insignificant part of the overall process of trading and of market behavior, itself.


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