How to filter market noise to succeed in trading? The price chart does not move in a straight line. It usually happens that even if the price has a certain trend, it still makes many small back and forth movements. These movements occur naturally as large positions in the interbank market are opened and closed.
When you open a trade, the ideal situation is for your position to move quickly for profit. However, random price fluctuations (the so-called “noise”) can lead you to a reduction and even prematurely trigger your Stop Loss. In addition, market noise can also give you false trading signals.
A trader always aims to make the most accurate entry into the market: one that conforms to the principle of “buy low, sell high” and is not followed by a reduction. To achieve this goal, it is necessary to understand how to deal with market noise. This is what we will explain in this tutorial.
If you look at a longer time period (e.g., D1), you probably won’t see many of the price movements that can be observed in a shorter time period (H1). As a result, if you see that shorter time periods and intraday trading are not your cup of tea, consider switching to longer time periods and increasing the period of your trades.
Focus on trends
Trend trading is one of the most logical approaches to the forex market. Minor corrections within a trend and intraday volatility are considered market noise in trend trading.
To reduce exposure to market noise, do the following:
1. Determine the direction of a trend.
Here you can use techniques such as trend lines, moving averages and other trend indicators.
2. Measure the strength of this trend.
The most popular technical indicator for measuring the strength of a trend is ADX. You can read more about how to use it here.
3. Use special indicators that eliminate market noise.
Here are the best tools to help you avoid false price movements.
4. Choose a business strategy that you want to use.
You can decide to trade for price actions; combine Heiken Ashi with ADX; use ZigZag along with Bollinger Bands; use Alexander Elder’s triple screen system that filters signals by using multiple time periods. There are many options to choose from. The most important thing is to make sure that you use at least one tool to eliminate market noise in your system.
Technical tools that help eliminate price noise
There are several indicators and technical tools designed to help traders ignore false market movements and focus on the big changes that can offer a good profit.
The zigzag is an indicator that marks significant price changes in the chart. The smallest market fluctuations that are below the indicator’s sensitivity threshold do not stand out. Therefore, Zigzag helps traders to see the big picture and to make decisions based on the real price dynamics. Here are the special guidelines for setting up ZigZag on your graphics.
Heiken Ashi is a custom technical indicator that provides traders with a completely new type of price chart. The indicator draws chandeliers that have a different formula from traditional Japanese chandeliers. In particular, open and closed prices are recalculated on the basis of averages. This modification allows you to ignore market noise and get specific signals about the strength of a trend. Read more about Heiken Ashi here.
Renko is another alternative to the simple graphic of Japanese chandeliers. Its special feature is that it does not take into account parameters such as “time”. A “brick” is drawn on Renko’s chart only when the price covers a certain distance up or down. As a result, a trader has a unique opportunity to study the market from the price orientation point. The ability to choose the size of the brick allows you to filter out small insignificant fluctuations. Click here for more information on Renko.
Dealing with market noise is the inevitable part of forex trading. You should definitely be aware of this phenomenon, as this way you will be able to avoid business mistakes and improve the profitability of your business strategy.
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