How to filter out distractions

 

I get a bit frustrated with the whole ‘New Year, New You’ industry. It’s usually trying to tell you that you’re horribly lacking and that your life will be perfect if you just buy this …

But that’s not to say that there’s no room for improvement, and that we shouldn’t be striving for better ways to do things and new achievements.

This January, the pile of books by my bed includes ‘Indistractable’ by Nir Eyal, which is a kind of antivenom to his previous book, ‘Hooked’ – it promises to train me to focus on the important stuff, rather than be distracted by the pings coming from my phone and computer.

There’s no shortage of distractions in the markets to send our trading off balance. It’s called ‘market noise’ for a reason, so I figured I’d kick off the new year with a list of the noise I want to hear, and the noise I want to filter out …

Noise or signal?

• Pundits and opinions

Newspaper headlines, data reports, market pundits, and general know-it-alls … all these can create a great deal of market noise. We should be aware of market-moving events, as they have the power to bump us out of trades. However, unless you have bribed someone to get a 3 second head start on data releases from a central bank … if you’re trading these, you’re just chasing the noise rather than reacting to it.

Following price action on charts will give you the most accurate picture of market sentiment, so I’d advise anyone to be very wary of listening to opinion or fundamentals in major markets and forex.

• Spikes

Spikes are those long wicks on candles that stick out into ‘thin air’ on our charts – forging into territory that we aren’t anticipating price action.

I don’t suggest that these should be ignored – the extremes of spikes can be some of the most powerful support and resistance levels out there. But I do advise that they are treated with caution – this is not normal everyday price action.

The chart below shows how a spike hasn’t affected the price behaviour in the channel that followed it. But it did offer a powerful resistance level that the price later reacted with.

• Smoothing curves

The most basic noise filter for your charts is a moving average. Here, a 20-period moving average smoothes out the bumps in our chart, giving a clear picture of the overall trends …

However, moving averages are based on the previous x-number of periods (the more periods you use, the smoother they are) – which means, by definition, they are lagging. They just tell us about what has happened – not what’s happening now.

While that can be valuable information, it’s not what gets us in on our trades nice and early.

• Removing time

At the other end of the spectrum are Renko charts, which ignore time altogether and look only at ‘blocks’ of price movement.

Here’s an example of a normal price chart, with lots of noise, spikes and false moves …

And here’s the same time period shown in a Renko  chart …

The ‘noise’ has been filtered out, and we can clearly see the trends. Notice that time only moves on when price changes – if price stays the same, it doesn’t move.

• Average bars

Heikin Ashi Mountain traders will already be familiar with the powerful effect of these ‘average bar’ candlesticks, which can turn this …

Into this ….

Working out what’s worth listening to, and what’s just background noise has a lot to do with understanding the timeframe you’re trading in. What’s just noise to a long-term investor, can be vitally important to a day or swing trader. When you’re looking at price behaviour, consider how long your trade will run for – will this information still be relevant in an hour, day, week’s time?

We can all be guilty of holding onto positions out of sentimentality for the ‘great’ signal we saw, that is now long-forgotten by the market. A lot of successful trading is about admitting when we got things wrong, cutting losses, and moving onto the next signal …

Here’s to a very prosperous 2020!

 

 

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