Understanding Noiseless Charts

Noise – the word itself can be discomforting. Too much noise can hinder the thought process, often resulting in wrong decisions. In the context of stock markets, noise can be volatility that results in price fluctuations in a short time as well as small price fluctuations that distort the overall trend.

In security markets, noise can limit or distort traders’ ability to gauge the actual reason behind a trend - whether the trade is actually reversing or has taken a pause before its next big move.

Interestingly, there is a category of traders who speculate based on the noise in the markets. Their trades are primarily reactionary, based on rumours and sudden price movements. Such traders do not rely on fundamental analysis/data to execute trades.

What causes noise in the market?

• Market fluctuations typically are a result of noise. Unless there is an actual event or announcement pertaining to specific security, it does not have the capacity to disturb the underlying trend.
• Large block deals by financial institutions or a group of brokers can also create short-term volatility/noise in a particular stock.
• Artificial bubbles created by a group of operators/noise traders in a specific stock also create unnecessary noise around that stock.

What are noiseless charts?

Thanks to the age we live in, several technical tools help traders ride momentum longer, gauge the reversal of trends, make informed decisions and maximise profits. Charts are a key tool that helps traders/technical analysts identify patterns, price movements and trends of securities traded on the stock exchanges.

• Noiseless charts are unidimensional charts that make use of only the price of a security to chart out the trends/patterns and price movements.
• They get their name as they use only one dimension for plotting, thereby removing the unsolicited noise/movements from the data and giving smooth patterns and trends.
• The traditional charts, on the other hand, make use of the dimensions such as price, time and volume.

Types of noiseless charts

Various charting options try to eliminate maximum noise from their representation of information, thus maximising their usefulness.

Some major examples of noiseless charts include:

1. Heiken-Ashi Charts
2. Renko Charts
3. Point & Figure Charts
4. Line Break Charts

We will take a look at each of them as we proceed with this module.

Points to remember

• It is important to have a trading system/trading strategy in place; otherwise, traders can fall into the trap of noise trading and incur losses.
• Traders who make informed decisions are less likely to get carried away by the noise than those who rely on rumours and market banter.