Tuesday’s Trade: A Matter of Scale

I put a bunch of new entries in my stocktickr watchlist this morning, all off scans of weekly charts. So, it may be a few days before they become viable, if they do. Either late tonight or tomorrow morning I’ll update that list, and add anything I can see from the daily charts.

A Matter of Scale
Does this ever happen to you? I’m clicking on Trade-Ideas alerts, to pull up the corresponding charts, and I spot this gorgeous looking drop. Just a nice smooth trend with gentle pullbacks going down all day. But before I go shopping for private islands, I glance over at the prices. That’s when I realize that, even though the candles moved from the top of my screen to the bottom of my screen, the drop only covered 15 cents, total. My trading platform “helpfully” adjusted the scale to use the space I had given it.

It can be mentally tricky, because if I asked for GOOG next, its daily range would fill the same space. Since charts look realistic at every scale, this kind of thing can easily fool you. To some degree, you can accomodate a smaller range by buying more shares, but there are limits to that.

At least, the way I trade, I can’t get into a stock without looking at the day’s trading range. It’s part of how I calculate my stop. But I have no such safeguards for volume. And, today I was fooled by… wait for it… volume! It’s my fault, of course. I can’t blame my stock charts for picking a scale that fills the space given to them. But, when I saw this on Quality Systems Inc. (Nasdaq: QSII):

… I thought it looked like a pretty good entry. It had fallen on relatively high volume, then had a little bounce, and was making new lows again. So I entered a short order. Then I noticed that my order was taking a long time to fill. Then, I saw the spread getting wider. Then, I noticed that the tallest volume line in the above chart only represented 6000 shares! Eek! Suddenly that spike looked an awful lot like the volume chart was giving me the finger. I cancelled my order and covered the shares that did fill for break-even.

Now, before you write me off as a complete “shoot-first, ask questions later” idiot, I did check the avg volume on yahoo finance last night. It says 436k. Not as high as I like, but not bad. But, if you look at the historical data, you can see that the number’s only that high because two days in June traded millions of shares. It turns out that, some days, this stock doesn’t even trade 100k! That’s why, for my top 50 list, I remove the highest volume day from my average, so anomalies like that can’t throw the average too far off.

“Hey,” you might be saying, “I thought you were only going to watch the million+ volume stocks on your top 50 list this week.” That’s true, but I’m also watching stocks on highchartpatterns‘ newsletter. I should note that I was trading their stock, but not their system. I picked a different entry than they did, since my entry looked good to me at first glance. They didn’t take the trade (the price never got low enough for them), and they are always preaching about volume in their newsletters. Good for them, and shame on me! Anyway, I’m glad I aborted my entry. The stock turned and went back up for most of the rest of the day.

Stocks Mentioned In This Article
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