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“NOISE” IN FINANCIAL PRICE SERIES –

(Last Updated On: September 9, 2011)

“NOISE” IN FINANCIAL PRICE SERIES –

What do you think about “noise” in financial price series? Many persons talk about backtesting, curvefitting, choice of the right parameters and so on.
There was  talk about the importance of how detecting “noise” in financial price series. I’d like to know your opinion.
I think is a very important aspect of trading, because a trading system can’t work properly without a “sound” stop loss (being out of the market “noise”) and without well researched exit rules.

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the very term “noise” originates from DSP (digital signal processing) where one of the main tasks is to decompose the composite into signal and noise. It assumes also that only signal carries meaningful information while noise is a waste. This task can be accomplshed in that domain because normally the signal has clear periodical or quasi-periodical structure. Since market data if plot as bars resembles quasi-periodical processes there are many attemtps to find some useful “signal” – in hope it will help being profitable.

However it is essential to understand that DSP and making money in markets are entirely different tasks. In the latter case you don’t have to do any DSP to market data, nor do you have to apply any math model at all. I mean it is not inevitably necessary. There are many ways of getting consistent profits without analysing price time series at all.

Thus said, I would say that the concept of noise in the market price data is mostly a matter of personal choice. My opinion is that there is no noise in the market, and every tick has its importance and meaning, however my systems usually work on much higher time scales. On the other hand if anyone is successful with applying DSP techniques to market data then of course the concept of noise has a meaning for him.

To answer your second question – placing stop-loss order at the boundaries of volatility range is extremely dangerous and most of the time leads to losses. Instead, a stop-loss should not be part of money management, it should act as an anti-catastrophic airbag. Thus I would classify exit rules as the most important, then entry rules and only then stop-loss levels and other precautions.

 

 

NOTE I now post my TRADING ALERTS into my personal FACEBOOK ACCOUNT and TWITTER. Don't worry as I don't post stupid cat videos or what I eat!

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