Last Updated on 05/06/2023 by DEUS Harvest
VISUALIZING MARKET DATA
In the “Market Snapshot” series, I aim to introduce traders to practical ways of quickly analyzing large amounts of data to gain a deeper understanding of market conditions.
When it comes to trading, we often need to process vast amounts of data simultaneously and draw meaningful insights from that data to comprehend the overall market signals. For instance, if you are tracking a list of 100 stocks for potential trades, solely relying on price returns or other individual measures may make it challenging to grasp the broader market conditions. Questions arise, such as: Is the market in a bullish or bearish phase? Is there market contraction or expansion? How does each stock compare to the market as a whole? Is it an outlier, or is it correlated with the market? To thoroughly assess the situation, considerable time would be spent analyzing prices and metrics.
As humans, we are naturally more adept at visualizing information rather than raw numbers. Therefore, one valuable tool to add to your trading arsenal that can assist in analyzing your trading list is the scatter plot.
I will first begin by explaining what a scatter plot is and then provide a method for incorporating it into your trading framework. By understanding the concept of a scatter plot and implementing it into your trading approach, you can enhance your assessment capabilities and gain deeper insights into the short-term price dynamics of the market.
WHAT IS A SCATTERPLOT
A scatter plot is a type of graph used to display the relationship between two variables. It consists of a set of data points plotted on a horizontal and vertical axis, where each data point represents the values of the two variables. The position of each point on the graph indicates the values of the variables for that particular data point.
Scatter plots are particularly useful for visualizing patterns or trends in data and identifying any potential relationships between the variables. They can help to determine if there is a correlation or association between the variables, whether it is positive (as one variable increases, the other also tends to increase), negative (as one variable increases, the other tends to decrease), or no significant relationship.
The scatter plot allows for a quick visual assessment of the data and can be helpful in identifying outliers or clusters of data points. It is commonly used in various fields such as statistics, data analysis, scientific research, and social sciences to gain insights into the relationship between variables.
MARKET SNAPSHOT SCATTERPLOT
In the “Market Snapshot” scatterplot, we utilize two variables: Range Spike and Price Return, which provide insights into market dynamics.
The Range Spike represents the level of volatility in the market, measuring how much the price has deviated from its average range. A Range Spike of less than or equal to 1 indicates a relatively stable and non-volatile market, while a Range Spike greater than 1 suggests increased volatility.
On the other hand, the Price Return reflects the direction and momentum of the market. A positive Price Return indicates a bullish trend, signifying an upward price movement over a given period. Conversely, a negative Price Return indicates a bearish trend, with prices declining.
By analyzing the scatterplot, we can classify the market into four distinct quadrants:
- Bullish/Non-Volatile: This quadrant represents a market characterized by positive Price Returns and relatively low volatility (Range Spike of less than or equal to 1). It indicates a stable bullish trend with minimal price fluctuations.
- Bullish/Volatile: Here, we observe positive Price Returns combined with higher volatility (Range Spike greater than 1). This quadrant signifies a bullish market with increased price volatility.
- Bearish/Non-Volatile: In this quadrant, negative Price Returns and low volatility (Range Spike of less than or equal to 1) indicate a bearish market with relatively stable conditions. It suggests a downward trend where prices are declining steadily.
- Bearish/Volatile: This quadrant represents a bearish market with heightened volatility. Both the Price Returns and volatility levels (Range Spike) are negative, indicating significant price fluctuations.
To provide a holistic perspective, we incorporate an additional area on the scatterplot representing a flat market. This area is defined by a Range Spike of less than or equal to 1 and a Price Return ranging from -2% to +2%. It allows us to identify periods of relative price stability and assess market conditions when there is limited directional bias.
INTERPRETING THE SCATTERPLOT
In our example scatterplot of the S&P 100, we observe that the majority of stocks are trading within a range spike of 0.5 to 1.9 and the price return falls between -1% to 2.5%. This information can be interpreted as follows:
- Market Stability: The range spike of 0.5 to 1.9 suggests a moderate level of volatility in the market. It indicates that the price movements of most stocks are within a relatively narrow range, indicating a certain degree of stability.
- Neutral Price Returns: The price return between -1% to 2.5% indicates a mixed performance among stocks. Some stocks may have experienced slight price declines, while others have seen modest price gains. This suggests a relatively balanced market with slightly bullish sentiment.
It’s important to note that these interpretations provide general insights into the market conditions based on the given data. However, they should not be viewed as definitive answers but as guidelines requiring further analysis and consideration.
Additionally, it’s crucial to understand the inherent uncertainty and variability in the market. Interpretations may vary depending on the specific context, time frame, and individual stock dynamics. Traders should exercise caution and conduct thorough analysis before making any trading decisions based on these observations.
Overall, the market snapshot scatter plot serves as a helpful tool to assess market conditions and identify patterns visually.