Learn The Noise

Let me ask you an important question: how do you have edge when everyone else has access to the same information that you do? If you’re making decisions based on what’s in the media and what’s being talked about on Twitter, you’re a part of the herd.

I always tell my students that if everyone could see what I see, there would be no need for CNBC and Fintwit chatter. I see the order flow and I know what’s happening in real time. I don’t need some anchor with a 30 minute delay who gets paid on ratings (and NOT how much money she makes me) to tell me what’s important and what isn’t. I see options market makers using the same tactics they’ve been using for YEARS to shakeout everyone in a weekly before it rips to the moon... I don’t need a couple thousand people on Twitter telling me AFTER it happened.

I don’t need someone else to tell me the story of what’s going on the markets. I see it being written, live, in front of my eyes.

But the truth is, the noise made by media and Twitter and whatever else you’ve got up on your screens or blaring on your phone... it’s not all bad. It’s like your emotions. You don’t want to blindly follow it, but if you can separate yourself from it and understand it, it can help you see where the system wants you to go.

And that means that instead of being caught up in the stampede, you’re watching where it’s going and deciding what you want to do about it.

I wish it were as simple as saying “You always want to follow what this person says” or “you should never follow what ANYONE else says.”

But the truth is more complex than that. It always is.

The best traders pull information from as many places as possible. Some information sources give them legitimate edge because few people have access to them or know how to make sense of them. Like the tape.

They also find individuals that are just really damn good at a skillset that complements their approach. Wall St. Jesus is a great example of that for me. The man has been trading (as a broker and independent professional) for more than 20 years. He’s spent more time thinking about flow - unusual options activity, sweeps, blocks, etc. - than you can imagine. He’s a freak, and a phenomenal source of information. I don’t blindly follow his read on the things, but you can bet your ass that I’m interested to hear it.

Where unsuccessful traders get into trouble is when they don’t pay attention to the incentives of their sources of information.

The tape has no incentive. It’s data, plain and simple. That’s part of what makes it so powerful. By law, every single transaction that occurs has to be reported to the tape. The tape can’t lie.

Some dude on Twitter talking nonsense... what’s his incentive? To avoid boredom. To be liked. Maybe to build followers so he can start a service selling even more of his ideas. To say something that goes viral so that he’ll get more attention. But it’s definitely not to make you money.

As for the media, obviously, they want clicks and eyeballs. But if you think about the alliance that outlets like CNBC have with the exchanges (don’t forget where their damn show takes place everyday... on the floor of the NYSE) then you start to realize that they’re motivated by other forces too. Exchanges don’t care if you make money, they just want VOLUME. Transactions. And what’s better at creating volume than a constant stream of trade ideas and analysis pushing you in a different direction every single day?

One of the most powerful realizations I’ve ever had as a trader is that - if I don’t consciously stop myself from doing it everyday - I will naturally follow the herd. My brain wants to go where the “group” is going because I’m hardwired to think that’s safe. It’s a survival instinct that will get you slaughtered again and again and again in the markets.

Equally powerful was the realization that if I could see where the noise was pushing the herd, I could make a shitload of money. I could use that as a SIGNAL - the exact opposite of noise - to alert me to opportunities. And that gave me edge.