Last Updated on 22/06/2023 by Ndanileka
READING THE CURRENT PRICE WITH CONTEXT
In our previous post, we discussed the importance of getting a quick market snapshot that will provide context into the current market condition. To achieve this, we utilized a scatterplot chart.
Moving beyond the overall market and looking into individual stocks as traders, we understand that the current price is the bedrock upon which our decisions are made. It reveals the present valuation of an asset, dictating whether to buy, sell, or hold. It is the price that we naturally make a decision based on. Therefore, being able to view the current price and derive some information from it is vital in our decision-making process.
While the current price provides essential information about the asset’s present value and forms the basis of our decision-making, it’s crucial to remember that it alone doesn’t offer a complete picture of the current market dynamics. Therefore to extract meaningful insights from the current price, it’s necessary to consider additional metrics that provide valuable context and enhance our understanding of the current market conditions.
METRICS TO PAIR WITH THE CURRENT PRICE
In this section, we will explore three key metrics that, when combined with the current price, offer valuable insights into the dynamic nature of the market. These metrics include the percentage price change, volatility (measured through the Range Spike metric), and momentum and direction (assessed using the daily range). Let’s delve into each of these metrics better to comprehend their significance and practical application in trading watchlists.
- Percentage Price Change: This metric indicates how much the price has changed from the previous closing value. As traders, our goal is to achieve returns from our trading systems. Understanding the magnitude of price changes is essential in assessing the potential for profit or loss.
- Volatility (Range Spike): To gauge the volatility of the current price, The range spike metric measures the current range of a stock based on its average true range. This information reveals how much the current range deviates from its typical fluctuations. High volatility may present opportunities for traders seeking larger price swings, while low volatility may indicate a more stable market. Another metric that can be used in place of Range Spike is the Sigma Spike, which serves a similar purpose in measuring volatility.
- Momentum and Direction (Current Price Cumulative to Daily Range): Assessing the momentum and direction of the current price involves considering its relationship to the daily range, which encompasses the highest and lowest price levels of the day. By examining how close the current price is to these extremes, we can gain insights into its momentum and potential direction. This information helps us identify whether the price is approaching or moving away from key levels, aiding our decision-making process.
The image below demonstrates how incorporating these concepts into a trading watchlist enables a quick assessment of share price performance throughout the day.
The concept of closely observing the current price throughout the day, as depicted in Jesse Livermore’s book “Reminiscences of a Stock Operator,” holds valuable insights for traders. In the past, traders would gather at broker houses and rely on the constantly updating price board as a significant part of their trading system. The act of patiently waiting for price updates and observing the market dynamics ingrained a sense of market intuition when reading price data.
In today’s world, with abundant information and advanced technology, we often overlook this old but powerful skill of observing and interpreting patterns that the human brain possesses. By developing the ability to interpret price data and monitor it consistently, traders can gain a deeper understanding of market movements.
Another notable aspect of Jesse Livermore’s time is that the number of available stocks for trading was relatively limited. This allowed traders to concentrate on price data and curate a watchlist of manageable size. Even in the modern world, we can apply this technique by selecting a focused list of around 100 stocks and conducting a thorough analysis. By narrowing our scope, we can gain insight into the selected stocks and uncover patterns or trends that inform our trading decisions.
MORDEN QUOTATION BOARD
While technology and access to vast amounts of information have undoubtedly transformed the trading landscape, it’s essential to recognize the power of observing the current price and cultivating a focused watchlist. Combining the advantages of modern tools with the wisdom of old techniques can help traders develop a well-rounded approach to interpreting price data and making informed trading decisions.
Our example image showcases a quotation board displaying stocks listed on the S&P 100. The board includes columns for price change, momentum, and volatility, providing context to the current price.