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Kaufman
Uses Multiple Trading Methods, Cites Market 'Noise'
By
Jim Wyckoff
(Note:
I wrote this story a few years back, when I was a journalist with
FWN.)
Many
traders attempt to find the single-most “robust” trading
strategy possible by looking for one set of rules which works for
all markets. Such systems don’t take into account the fact that
markets can change quickly and dramatically due to a news event,
according to Perry Kaufman.
“There
are times when a market is volatile, or moves unusually, and you
need to take different strategies to trading,” said Kaufman, a
market strategist, author and director of research for the
consulting firm Kaufman, Diamond & Yeong, based in Wells River,
Vt. He was speaking at the Technical Analysis Group (TAG XVIII)
traders conference, held here late last week and sponsored by Dow
Jones Telerate.
“Price
shocks”--a government economic report or other major news
event--can quickly turn a quiet, sideways market into a volatile and
highly discretional one, he said. A trading system that works in a
sideways market will likely not work well in a volatile one.
Kaufman
focused on what he terms “market noise,” which is the
unpredictable movement of a market. He said more active markets have
more market noise, and are therefore harder to trade.
The
formula for measuring “market noise” is as follows, according to
Kaufman: Change in price divided by the sum of each price movement
over a period of time.
More
market noise means it takes longer for a trader to identify a trend
in a market, said Kaufman. He said the S&P 500 futures are very
“noisy,” and therefore need a longer time for a trend to
develop. Conversely, Eurodollars have less noise, so traders can
jump on a price trend in a shorter period of time.
Very
long timeframes make market noise less significant, said Kaufman.
For short-term trading, noise is more important than the trend, he
said.
“Short-term
(price movement) is mostly noise and long-term is mostly trend,”
said Kaufman.
“If
a market has high noise, you should not trade with a trend-following
system,” he said.
Kaufman
ranked the world’s markets by their “noise” factor--keeping in
mind his proposition that less noisy markets are easier to trade.
Brazil
has the least market noise because it’s an emerging marketplace,
said Kaufman. There’s less participation in emerging markets.
Thus, “you can trade trend-following systems and faster moving
averages” in those markets, he said. Indonesia, Turkey, Malaysia
and South Africa are among the other less noisy world markets, he
said.
The
U.S. markets are the noisiest, most active markets, and hardest to
trade, said Kaufman. France, Japan, Germany and U.K. markets are
close behind.
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