Noise Trading
Trading on information that carries no genuine signal about value.
How it is identified
Test: the trade is prompted by rumour, pattern or sentiment rather than by information that changes the asset's expected cash flows
Unit
qualitative
In depth
Noise traders are a formal concept in finance rather than an insult: their presence explains why prices can deviate from value and why those deviations can persist, since arbitrageurs face the risk that noise gets worse before it gets better. That limit to arbitrage is why mispricings are not corrected instantly. Noise traders also supply the liquidity that lets informed participants transact, so the market needs them. The uncomfortable question for any individual is which category they are in, and the honest test is whether the information acted on was genuinely unavailable to others.
Worked example
A rumour on a messaging group moves a small-cap 9% in a session. Nothing about the company changed, and the traders on both sides transacted on identical non-information.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Noise Trading” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.