Proportion and Perspective (Give That Chart Some Room)

May 17, 2011
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Good advice from Leonardo da Vinci:

Every now and then go away, have a little relaxation, for when you come back to your work your judgment will be surer. Go some distance away because then the work appears smaller and more of it can be taken in at a glance and a lack of harmony and proportion is more readily seen.

With a little imagination, you can probably see the wisdom of “stepping back” every so often.

But for discretionary traders, it applies to charts too…

Charts are funny things. Many traders base their decisions off charts without realizing the actual design of the chart can influence their psychological state (and thus the decision making process).

How does chart design influence a trader? Two ways: angles and velocity.

  • The visually perceived steepness or flatness of a trend (i.e angle) is a function of chart height and width. See for yourself — take any rectangle-shaped chart and make it tall rather than wide, like a cereal box. Voila: Instant trend steepener!
  • The visually perceived volatility or “action” in a price series is a function of height, width and bar count (how many bars, candlesticks or datapoints are displayed on the chart). The closer in you go, the more excitable the price action appears.

It’s important to be aware of this. Otherwise, you may be falling prey to accidental influence from some random element of design!

Mentally we can acknowledge that angles on a chart are intrinsically meaningless (except relative to each other). They have to be, because we can universally manipulate those angles (via chart shape) without touching the price data. (William Eckhardt first pointed this out in New Market Wizards.)

We can also acknowledge that the perception of “action” on a chart can purely be a function of how close we are looking — whether we are observing the price action up close or standing farther away.

(Simple analogy: Imagine experiencing World War III as a soldier in the trenches, versus observing it from the space station. The farther out you go, the more peaceful things get.)

The tricky thing is, we can acknowledge these biases but can’t get rid of them. They will always be there (unless we want to stop using charts).

So what is the best solution? We would recommend deliberately “taking a step back” — as da Vinci advised — based on the following logic:

  • Discretionary traders generally tend towards trading too much (rather than too little).
  • Discretionary traders tend to err towards impatience (rather than hesitation).
  • If you sense these potential biases, “giving the charts some room” could be a helpful balancer for your trading.

Let’s walk through some examples, all using different perspectives on the same chart.

Here is our starting point:

On May 16th, 2011, there was a significant technical development for small cap stocks (as proxied by IWM and the Russell 2000). Namely, small caps broke below the 50 day exponential moving average for only the second time since QE2 began — broadcasting clear warning that toppy congestion could resolve to the downside.

Now let’s filter the above paragraph through the lens of various charts, each one an additional “step back” both visually and psychologically.

First the roller coaster:

Does that thing look like a thrill ride or what?

Near vertical ascents! Harrowing declines! And now, a drop that could lead to a plunge… see how this chart fairly screams “action?”

But look what happens when we mellow out a bit. Exact same data series, different chart:

Now we have “taken a step back” as da Vinci advised. The volatility is still there. The price movement is still there. And you can still see the importance of the 50 break (the move below the gold line) relative to the long QE2 trend, perhaps with even more clarity than before.

But this vantage point isn’t nearly as hyperactive as the first one. It gives a better sense of proportion, you know?

Now let’s step back yet again:

That chart gives a sense of “big picture” going all the way back to mid-2009.

Notice how different each chart feels. As you remove yourself from the immediacy of the action, detachment becomes easier. A sense of calm develops. The temptation to act “IMMEDIATELY” perhaps fades a little bit. (A good thing, as markets often take their sweet time!)

And finally, for the piece de resistance:

With the weekly chart we have a truly full snapshot, dating back years, encapsulating the sheer violence of 2008 and all that followed.

And hey, what happened to that melodrama we saw in the first chart?

From this vantage point the “action” has faded away to nothingness — much as short-term cares and worries fade when the earth becomes a pale blue dot.

So which chart view is best? That depends on you. If you’re a swing trader as we are — looking to carve out substantial gains over multi-week or even multi-month moves — then a little detachment from the sturm und drang can probably help.

We prefer taking in multiple chart formats simultaneously (the 30″ Ultrasharp monitors and Tradestation platforms help with that). Being involved in real time, regularly entering and exiting trades, gives us a feel for the nitty gritty of day-to-day price action.

In other words: We get our fill of near-term price action between the opening and closing bell; the “stepping back” chart element thus helps us maintain proportion and perspective.

If you are looking for more patience in your trading, a higher quality filtering process, or a better sense of large-scale capital flows, a visual adjustment to your chart mix might similarly improve results.

JS

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3 Responses to Proportion and Perspective (Give That Chart Some Room)

  1. gunslinger on May 18, 2011 at 3:15 pm

    No

    What you need to do is move in Closer!

    Hourly charts, then fifteen minutes, then five minutes, then minute, then tick charts.

    Don't be a PUSS!

    • Jack Sparrow on May 19, 2011 at 12:14 pm

      Now see, it's interesting that you mentally frame it that way.

      In the '87 crash, Soros lost circa $800 million, then fought his way back on the quarter and the year. At an Ira Sohn conference, David Tepper reported being down $1 billion and shrugged it off (before making it back in spades).

      You really think the true ballers are sweating tick charts?

  2. Jonathan Leon on December 9, 2013 at 8:14 am

    Behavioral Finance is a pretty interesting discovery and very beneficial along side this read. All markets are made with 100% of people or algo’s created by people. Knowing how the mind works is a very important element in trading the markets. I have been a trader for 13 years, not profitable for most of those years. It took a long journey and a path away from staring at charts.

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