Chapter 5 Watchlists

In this chapter …

I explain how to prepare and use watchlists, one of the most important information-gathering tools for a trader.

Collecting information is crucial to traders, but it’s an area that so many fail in. If you collect bad information or the wrong type of information (noise) then your trading will suffer; this is the case for many private traders in particular. It’s not just a case of ‘the more, the better’ — it’s the quality of information that matters, and how we apply it. So before I begin to explain how to build watchlists I first need to explain the difference between information (which we need) and noise (which we don’t).

Information and noise

To understand the difference between information and noise, it’s perhaps easier to start by understanding the latter. Noise is the opposite of factual or reliable information, so it would include rumours or even a particular person’s views. ‘Noise traders’, as defined by Fisher Black, are traders who trade on such evidence in the belief that it provides edge. I believe that technical analysis traders are also a significant group of noise traders, as the evidence shows that using chart patterns and indicators is unlikely to lead to profitability for most. Indeed, a research piece about the head-and-shoulders pattern by the New York Federal Reserve referred to those who used the pattern as noise traders because they used it in the belief it would generate profits, while in reality it was unreliable. ...

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