Buy-Sell Timing Feedback Graphs

Aug 25, 2008

If you're a stock trader you've probably had many days where you want to hit your head on a wall for selling/buying a stock way too early or late. But psychologists have always noted that us human beings tend to remember things that are great emotional events, and if you invest in the stock market, these huge gyrations in stock price equates to those types of emotions. But these can be quite deceiving given that you would tend to judge your performance on few events that leaves an impact on you emotionally rather than see your overall trading performance.

A good way to track your buy or sell timing is keep track of those trades and then monitor the stocks price movements in a given time period before and after you execute the trade. This is where a spider graph is a perfect way to give you feedback of your overall trade timing ability. A spider graph has two axes, first axis is the distance from the center and the second axis is the rotation. So in essence, a spider graph is like a bullseye target. Our implementation using this type of graph looks at a trade and compares the trade execution price for 3 months before and 3 months after the trade date. The highest and lowest price for that specific security are then compared to the trade price, calculating the percentage difference. Given that to maximize your trade profits, you want to be able to buy at or as close to the lowest price and then sell at the highest possible price, the data points are obtained by looking at the trade buy price and then comparing this price point with the lowest price the stock had dropped to during a specified time frame. Conversely, the trade sell price is compared to the highest price the stock had reached. With these data points, two separate spider graphs can be created (one for buys and one for sells) to give you a graphical feedback on your trade timing. Simply put, the closer your data points are to the center of the graph, the better your ability to time the trades. Similarly, the bigger the area the data points create, the worse your timing is at selling or buying stocks.