Wednesday, February 8, 2012

Chart Granularity: An experiment

For the past few months, as I screen stocks, I've been using charts with fairly broad granularity.

My main chart has been a 3- or 6-month daily, buttressed by a three-year weekly, and then for the final decision, a 10-day hourly.

All chart reading is comparison -- where the price is now compared to where it used to be. A six-month chart means used-to-be can be as early as August 2011, or in the case of the weekly chart, as early as February 2009.

But for a short-term trader, do price levels that long ago really matter much? Arguably, not.

An alternative would be to use charts with finer granularity -- for example, a one-month daily chart buttressed by a three-day half-hourly chart, with a five-year weekly chart for reference after the decision is made.

In other words, the decision wwould be based solely on the monthly and three-day charts. The weekly chart is something I would look at during the subsequent analysis.

That focuses my eye and mind much more on the now, which is the only place in time that I have any influence over. The past is beyond my reach, and the future, beyond my ken.

Readers who've checked out my essay "10,000 Charts" will know that I select stocks for trading the way the NCAA selects champion basketball teams.

I run my stocks through a tournament bracket, comparing two charts against each other to select the best for whatever direction I'm testing, and then pitting those winners, two-by-two, against each other until I have a champion.

Today's large-cap selection of stocks had these seeds: TXN vs. BEN, WTW/SHI, MNST/ABC, CS/IRM, DB/VLO, WPPGY/HIT, APH/CMG and EMR/PCAR.

When I ran the bracket before the close using charts with broad granularity, the Final Four were BEN, MNST, WPPGY and CMG. The semi-finalists were MNST and CMG, and CMG came out the champion.

After the close, I ran the charts again, this time using the finer granularity charts, with very different results.

The Final Four were SHI, CS, DB and CMG. The semi-finalists were SHI and DB, and SHI -- with volume today of a mere 14,840 shares -- was the champion.

The only stock in common between the  two Final Fours is CMG.

Any conclusions from this exercise will depend upon what happens next. Where will CMG be a week from now compared to SHI?

The only conclusion that can be drawn now is that chart granularity matters. Whatever granularity a trader chooses, it imposes a bias on how he or she interprets the price action.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

No comments:

Post a Comment