Stock Charts: Calibration for Profits!
by Ian Harvey
September 03, 2012
One of the first things most traders look at when considering a trade is a stock's price chart. For some traders it's the most important thing. But there are a lot of stocks out there, and it takes time to look through every single chart. Also, many investors are numbers oriented, therefore they like everything quantified. This all takes a great deal of time so this article attempts to create a method to rank stocks based on how solid their stock charts look.
Patterns in Stock Charts
Different traders look for different patterns when going through stock charts. Some traders may look at a list and think, "I'd rather go short these stocks than long!" So, this method discussed, does not necessarily suit every investor – this is one scenario only, and each individual investor needs to formulate their own method of interpretation – hopefully, some of this information may help!
Explained below is what to look for in a stock, and how to quantify it.
• A Slow & Steady Uptrend -- a very orderly year-to-date (YTD) advance -- a stock that seems to go up no matter what. As such, the first and simplest measure to consider is the year-to-date return. Simply put, look for stocks that have been increasing.
However, do not look for a stock that scored all its gains in one day. Those are stocks that had a great earnings report or jumped on some one-time event that raised the value of the company.
• Therefore, another thing to look at is the total number of up days for the stock. It is important to want a stock that is up almost every day.
• A third thing to look for is stocks that did not have huge gyrations on their way up. It is scary when stocks go way up and way down on a daily basis. (However, bear in mind that this could also present a very quick profitable move if you are trading short-term, particularly with options trading. To measure this movement, calculate the standard deviation of their daily returns. Look for stocks with a low standard deviation.
• Finally, this may overlap some of those already discussed, but it is important not to suffer huge losses while the stock rises. So, the last figure to look for is the stock's maximum drawdown for the year.
In other words, by using the aforementioned four pieces of information it is possible to find stocks that have been in a slow, consistent, orderly uptrend, which will eventually present a nice long-term portfolio when calibrated correctly.