1. Introduction to Stock Trader Types
  2. Stock Traders’ vs. Stock Investors' Roles in the Marketplace
  3. Decision-Making Methods: Informed, Uninformed, Intuitive
  4. Informed Traders: Fundamental Traders, Technical Traders
  5. Swing Traders
  6. Buy and Hold Traders
  7. Value Traders
  8. Trend Traders
  9. KISS Traders
  10. Momentum Traders
  11. Range-bound Traders - Break-out Traders - Channel Traders
  12. Options Traders
  13. Options Seller Traders
  14. Day Traders
  15. Pattern Day Traders
  16. Intra-Day Traders
  17. Intra-Day Scalp Traders
  18. Contrarian Traders
  19. Active and Passive Traders
  20. Futures Traders
  21. Forex Traders
  22. Online Stock Traders
  23. Pivot Traders
  24. News Traders
  25. Noise Traders
  26. Sentiment-Oriented Technical Traders
  27. Intuitive Traders
  28. Price Action Traders
  29. Price Traders
  30. Detrimental Traders
  31. Unsuccessful Types of Stock Traders
  32. Conclusion

The term “noise trader” seems to have emerged in the mid-1980s. It was coined by Albert Kyle and Fischer Black, and it refers to a stock trader who lacks access to inside information and, as a result, makes irrational investment decisions. A noise trader is a stock trader who adds liquidity to the market without distorting valuations, according to the efficient market hypothesis. Put in another way, a noise trader is one who does not use fundamental data. As a result, they tend to have poor timing, and they usually follow market trends. They tend to overreact to news about the market.

While the success rate of an individual noise trader may be poor, a market actually requires a degree of noise trading. Prices in a market tend to become fully revealing without sufficient noise trading. In a completely efficient market, it is impossible to profit; noise traders are thus the “losers” who prompt informed traders to profit.

Noise trader risk

Noise traders trust the movements of others over the fundamentals of the market or a particular company or stock. They usually mimic other investors, even when those investors are erring. The result is that they put themselves in risky positions.

Noise traders tend to rely on poor sources of information, including minor and anecdotal news, the daily chatter of financial media, and minor vibrations in the market. Some of these are caused by noise traders themselves and are a result of erratic behavior.

Conclusion

Many noise traders are overtraders as well, meaning that they spend time completing an excessive number of trades relative to the profit they could bring in. While this adds liquidity to markets by boosting the transaction volume, creating a solid presence of counterparts for buy and sell orders, it tends not to benefit the individual trader. It can also bring market excesses into one area of the market or another. Noise traders tend to have a short-term impact on market activity, but as the time horizon of an investment increases, the effect of noise trading becomes less prominent.


Sentiment-Oriented Technical Traders
Related Articles
  1. Investing

    Buying a House Near an Airport? Consider These Factors

    Is buying a house near an airport advisable? The pros and cons.
  2. Trading

    Trading Without Noise

    False signals can drown out underlying trends. Find out how to tone them down and tune them out.
  3. Trading

    Introduction to Stock Trader Types

    What type of stock trader are you?
  4. Personal Finance

    A day in the life of a day trader

    Day trading has many advantages, and while we often hear about these perks, it's important to realize that day trading is hard work.
  5. Investing

    How to Set Up Your Trading Day

    Don’t start your trading day without taking these four steps to set up your trades.
  6. Investing

    Explaining the Coase Theorem

    The Coase theorem states when there are competitive markets and no transaction costs, bargaining will lead to a mutually beneficial outcome.
  7. Trading

    10 Traits of a Successful Options Trader

    This article will help you understand the 10 characteristics required to become a successful options trader.
  8. Trading

    Average Rate of Return for Day Traders

    Is it possible to determine the average rate of return for day traders, and what does it take to get started?
Frequently Asked Questions
  1. What is the role of the nation-state in globalization?

    Learn about the evolving role of the nation-state in an increasingly globalized world as fewer boundaries restrict international ...
  2. What are some examples of positive correlation in economics?

    Learn the most common examples of positive correlation in macroeconomics and microeconomics, including demand and price, ...
  3. Human capital vs. physical capital: What is the difference?

    Learn the difference between physical capital and human capital. How to find the value of each type of capital in a company's ...
  4. Which factors can influence a country's balance of trade?

    Find out about the factors that affect a country's overall balance of trade and how it is used as an economic indicator.
Trading Center