Noise traders are investors who base their trading choices on perceived market trends instead of actual market fundamentals analysis; they tend to adhere to unverified signals of various kinds and constitute a significant part of the market’s trading activity on any particular day.

Noise trading is a general term used to describe traders or investors who make decisions regarding buy and sell trades in securities markets without the support of professional advice or advanced fundamental or technical analysis.

Trading as noise traders often involves impulsive decisions driven by irrational enthusiasm or emotions like fear and greed. These investors generally follow prevailing trends, display herding tendencies, and overreact to both positive and negative news.

Risk of falling into the category of a noise trader

Noise trading carries its own set of risks, as it involves investments dictated by noise traders who are typically unskilled, uninformed, or inexperienced retail investors. Their investment basically tend to follow market trends, investment actions based on emotions and majorly lack of discipline. Their activities can result in price fluctuations and lead to decisions that deviate from those made by more knowledgeable traders.