A reader emailed me about methods to detect trends early in their move, and I mentioned that faster indicator settings can pick up trends earlier, but they also tend to incur more fakeout signals due to market "noise." Read on below for more on how to reduce the impact of noise in your trading.

At a recent trading show, I was struck by the fact that so many traders said they were using 1 minute or 3 minute charts to trade the markets.  In my experience, the shorter you make your bar length, the more your noise level on the chart will increase.

Systems trading guru Perry Kaufman defined "market noise" as the change in the price divided by the sum of each bar's price movement over a given period of time.  The idea here is that whatever trend you are following, the more price movement it takes to get there, the more noise you have.

As a trader, I've learned that increased market noise tends to diminish my confidence that the trend is doing what I expected it to do.  In addition, increased noise will tend to fake my method out more, as you may appear to get a close above a breakout point on a 1 minute chart, but on a 10 minute chart it will then have reversed back down where you did not get the new buy signal in another 9 minutes after the first 1 minute signal.

I often note that there are "breakout" markets and there are "fakeout" markets.  Which market condition are we in? In recent months we have experienced more of a breakout market to the upside, after enduring the fakeout markets of prior years.  Certainly riding a breakout market is much easier than trading a reversal-driven fakeout market. The way to trade fakeout markets is to look for important divergences.  But the other way to avoid more fakeouts when you are looking for true breakouts is to increase the bar length interval.

By now, you're probably wondering what my preferred bar length intervals are.  Before I answer that question, let me first say that you need to start at a longer time frame and then work your way down to shorter intervals later.  Perry Kaufman said that longer-term price action tended to have more trends while shorter-term intervals tended to be more random and noisy, and prone to more reversals.  I like to start with the weekly chart, then work down to a daily, then look at a 60-minute.  I do have shorter-term systems that go as short as a 10-minute bar.  But in choppy markets, my favorite timeframe has been the hourly 60-minute bar chart.  When I find a longer-term trend, up or down, and then can synch up the 60-minute chart in the same direction as the broader trend, I've found that the odds of success rise significantly.  If you feel like your head is spinning from too many whipsaw signals, try increasing your time frame by a factor of around 5 (for example, if you look at daily charts, also look at the weekly chart, since there are 5 days in a week; if you look at 10-minute charts, also check out the 60-minute chart for broader trend confirmation).  This should allow you to take a step back and see the bigger picture, as less noisy and more trending markets are definitely easier to trade.

Price Headley is the founder and chief analyst of BigTrends.com.