A noise trader is a
stock trader whose decisions to buy or sell are based on "factors they believe to be helpful but in reality will give them no better returns than random choices".
These factors may include hype or rumor, which noise traders believe to be reliable signals of future returns, but which are actually forms of
economic noise that cannot be used to accurately predict the future value of a stock.
Noise traders do not trade randomly; their decisions are systematic.
However, their trading decisions are not based on professional advice or a business's
fundamentals
Fundamental may refer to:
* Foundation of reality
* Fundamental frequency, as in music or phonetics, often referred to as simply a "fundamental"
* Fundamentalism, the belief in, and usually the strict adherence to, the simple or "fundamental" idea ...
,
and the purported signals used by noise traders are more unreliable than those used by
technical analysts
Technical may refer to:
* Technical (vehicle), an improvised fighting vehicle
* Technical analysis, a discipline for forecasting the future direction of prices through the study of past market data
* Technical drawing, showing how something is ...
.
Therefore, returns on their trading decisions are expected to be no better than random choices.
Noise traders often act irrationally: they tend to be emotion-driven, impulsive, reactive, and herd-like.
The presence of noise traders in financial markets can cause prices and risk levels to diverge from expected levels even if all other traders are rational.
See also
*
Noisy market hypothesis
In finance, the noisy market hypothesis contrasts the efficient-market hypothesis in that it claims that the prices of securities are not always the best estimate of the true underlying value of the firm. It argues that prices can be influenced by ...
*
Quantitative analyst
Quantitative may refer to:
* Quantitative research, scientific investigation of quantitative properties
* Quantitative analysis (disambiguation)
* Quantitative verse, a metrical system in poetry
* Statistics, also known as quantitative analysis ...
*
Behavioral economics
Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from those implied by classical economic theory. ...
Notes
Financial markets
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