Are you a NOISE trader?

Friend #1 : Hey did you know that ABC company is going bankrupt soon?

Me: Oh! Really?!? Who say so?

Friend #1: My uncle who bought some stocks told me so, his banker friend's told him! It must be true!

Friend #2 : Oh no! I will have to call my broker and sell all my shares before ABC goes belly's up.

Me: Oh! Ok...see you guys later I have an article to write for my blog.

When I start investing, back in 2004, I did the same mistakes. I listened to friends and family, buying and selling stocks on fabricated news, making non sense decisions and losing money.

The term "Noise Trader" describes an individual who makes irrational investment decisions without the use of fundamental data. Noise traders trust the movements of others over the fundamentals of the market or a particular company or stock. They generally have poor timing, follow trends, and over-react to good and bad news. They usually follow and copy other investors decision making, even when those investors are incorrect. The result is that they put themselves in very risky positions.

Information is key in trading, but most "Noise" traders rely on poor sources of information, often from minor and anecdotal news. Some of these news are caused by other noise traders and snowballed into erratic behavior as a result. Noise traders tend to overtrade, they fear of losing a trade, or missing out, they spend time completing an "excessive" number of trades relative to the profit they could bring in.

As trader, you must spend time educating yourself, you must have a well define plan, and always follow your process. Don't let bad information take you into irrational trading decision.

VTL