The Basics

Noise Trading

One of the more interesting topics I’ve come across in my delving into research in the area of Behavioral Finance is the term “noise trader”. I’ve been reading a paper on the subject which has former Treasury Secretary Larry Summers as one of the co-authors. To put it simply, noise traders are those who do not operate on a strictly rationale valuation basis when making buy/sell decisions in the market. In other words, if you’re reading this blog post you are almost certainly a noise trader in the way academia defines the term.

One of the things I find interesting is how Summer & Co. refer to the non-noise set of market participants as “sophisticated investors”. The implication is that these folks can build a proper valuation model with the correct inputs that correctly account for risk. The implication is that noise traders can’t correctly estimate future risk (among other things), while the so-called sophisticated investors never makes any errors in estimating all the contributing factors which go into a valuation calcuation. Not very realistic in a world of failable human actors, in the latter case, or in terms of valuing the abilities of some very smart researchers on the other.

What’s kind of funny is the expressed observation of the paper that noise traders make value investing a sub-optimal course. One the one side, noise traders are said to increase volatility, and thus risk, reducing asset prices (stocks, really) in terms of their attractiveness to the non-noise set. On the other side, the added volatility actually increases the returns accruing to a noise trading approach. I think a lot of traders will feel vindicated in this. 🙂

I haven’t gotten all the way through the paper, and there’s a lot of very academic stuff, so it’s not the easiest read in the world. For those with an inclination, though, it’s an interesting bit of intellectual discourse.

Trader Resources

Forex Market Seasonal Patterns – Really!

Much of the time, when the idea of seasonal patterns is brought up in trading and the financial markets it is related to commodities. The commodity market, with its production cycles (crop harvest times, winter heating, summer driving, etc.), has some very obvious seasonals which impact the way prices move. This is all well documented.

The foreign exchange market, however, is not generally one where people thinking about the seasonal impact on prices. They exist, though. I’ve done research on the subject confirming that.

Several years ago I noticed an interesting pattern in EUR/JPY by which it rose regularly during a certain month of the year. I was able to use that knowledge profitably and it got me wondering if there were more such patterns. I wasn’t really expecting to find any.

Needless to say, I was surprised when calendar patterns showed up all over the place – in many different currency pairs, at all different times of year, and in both short and longer term timeframes. Knowing that information was something many traders would probably find extremely valuable, I put together a full 175 page research report – Opportunities in Forex Calendar Trading Patterns.

That was back at the start of 2006. I updated Opportunties at the start of 2007, but decided after that to retire the report. Toward the end of 2008, though, I started getting regular inquiries about it – traders wondering if it was still available. After asking around and finding out that there was definitely interest, I decided to revive the report.

Actually, I went a bit further than that. I completely overhauled and expanded Opportunities. It’s now 260 pages and even more useful than the previous editions. It covers all of the majors and major crosses, plus I created a set of individual indices for the major currencies (similar to the Dollar Index) to look at the general patterns of individual currencies outside of specific pair relationships. If you trade forex you’ll want to take a look for sure.

I’m not going to say I understand why all these patterns take place. It obviously has something to do with capital and/or trade flows during different times of year. I’ll leave the explanation of that sort of thing to someone more in the know on the subject than I am. I just want to know it’s going on so I can put that information to use in my trading.

Seasonals, of course, aren’t guarantees that the market will trade a certain way at a given time of year. What they can do, however, is help you put the odds in your favor. That’s really half the battle in successful trading.

If you want that extra edge for your trading, I definite encourage you to check out my forex seasonals research report.

P.S.: Much to my surprise, I was just contacted by a group in Singapore about getting copies of the report for libraries, companies, etc. That was quite interesting, especially since I haven’t really done much by way of getting the word out yet.