(Posted December 1, 2001)
One of our original reasons for writing StockEval was because we wanted a Main Graph that is more intuitive and easier to interpret. We wanted to be able to judge the overall situation "by eye" from looking at the Main Graph, in order to judge if, when, and how much to buy or sell. So the Main Graph of StockEval was constructed to present all the most important information to the trader or investor in such a way that he/she can grasp the overall situation with a stock and compare different stocks easily and rapidly. StockEval acquires historical price and earnings data, and also uses historical discount rates, performs a lot of complex calculations, and presents the results in such a way that the trader or investor can make the best use of this information to make effective trading or investing decisions.
The specific problems that the Main Graph solves are as follows:
In order to test the appearance of the indicators of the Main Graph, and of all other technical indicators, any number of days in the past, the Historical View has been provided. To run the Historical View, select it on the toolbar, type in the number of days in the past you want to go, and then the calculation will be done as it would have appeared in the past, using only past data. This way you can see to what extent the Price Projection can anticipate future price moves. You can also measure the actual Error Bars of the Price Projection, to compare them to the theoretical Error Bars displayed on the Main Graph. In this case, you will note that the measured Error Bars do not extend to the end of the Price Projection unless you have at least 2000 days of historical data.
In addition to these features, you can also plot any number of exponentially weighted Moving Averages and Horizontal Lines, in any colors you choose. The color is chosen by means of the Windows Color dialog. The Moving Averages are with respect to the long-term Reference Curve, so as the time scale gets longer these Moving Averages converge to the Reference Curve. Thus the Moving Averages are of the price fluctuations with respect to the Reference Curve, not of the actual prices with respect to zero price. This is a different way of doing the Moving Averages, but we view it as an improvement.
When you place your mouse cursor anywhere on the graph, a Tool-Tip appears, displaying the date of the closest trading day. This makes it easy to determine the exact date of any price bar on the graph. The future price bars in the Price Projection are labeled by the number of trading days since the last historical trading day.
These features make the Main Graph itself the most important source of information for making your trading and investing decisions. StockEval analyzes and presents a lot of information in the Main Graph, in a very intuitive way, that makes it a lot easier to judge the overall situation with each stock and to compare the performance of different stocks at a glance.
When you first open a stock data file, a Main Graph similar to this one appears:
The yellow curve is the long-term Reference Curve, and the cyan and magenta curves on either side of it are the Bollinger Bands, corresponding to one standard deviation and two standard deviations, respectively. The black bars represent the historical high, low, and close price data. The sky-blue curve running through the data is the N-day smoothing curve, produced by the Savitzky-Golay digital smoothing filter. This curve is similar to a moving average, except that there is no time lag. The blue squares are the Price Projection, produced by the Linear Prediction routine. This should be interpreted as a plausible estimate of the future price action, based on the past price action. The blue bars are error bars representing one standard deviation, estimated from the price ticks of the Price Projection and the estimate of the daily Volatility from Linear Prediction. These error bars are approximately the same as those of the Random Walk model, to be conservative. The green and red rectangles are N-day buy/sell points, calculated as the maxima/minima of the N-day smoothed Trading Rules indicator (one of the Technical Indicators). You can vary these buy/sell points by varying the time scale and the trading parameters in the Trading and Portfolio Parameters dialog box. The buy/sell points in the Price Projection are estimated optimum times to buy and sell, whereas the buy/sell points in the past data merely serve to illustrate their method of calculation. The orange curve is the Theoretical Price, calculated from the historical earnings and discount rate data. Along the bottom is the logarithmic volume indicator, which shows the logarithmic volume relative to the average log volume. That way, you can tell at a glance whether the log volume is higher or lower than average. In the upper left corner is the Deviation Index, which measures whether the (smoothed) current price is higher or lower than the (smoothed) Price Projection from N days ago. Finally, the number in the lower right is the number of days of historical data in the stock data file.
If the Theoretical Price curve or the buy/sell points get in the way, they can be turned off by means of two check boxes in the Moving Averages dialog box.
If you go to the next higher scale (using the blue arrow buttons on the toolbar), the whole graph is scaled up by a factor of two:
Notice how the slope of the graph at each point is the same as in the previous graph. The slopes of all graphs are on the same scale between different stocks and different scales of the graph, at all points in time. This slope is the percentage rate of change of the stock price, which is the primary number that is of interest in judging the stock performance. It is important to be able to compare this slope directly between the same stock at different times, and between different stocks. This seems to be a feature that is lacking in most charting software and printed stock charts.
The time scale for the historical data is displayed in months. The month of September is off a little because that month of trading was shortened by a week due to the 9/11 disaster, which was an anomalous event. The time scale for the future Price Projection is listed as days in the future, and the present time is listed as "ZERO". We decided to spell out the number "ZERO" everywhere in the program, to make it more prominent.
Notice the discontinuous jumps in the orange Theoretical Price curve. These correspond to changes in the discount rate. Each time the discount rate goes down, this is favorable for stock prices, and results in an upward jump in the Theoretical Price. The Theoretical Price is an estimate of where the stock price should be, based on Fundamental Analysis. For the majority of stocks, the actual price is quite a bit higher than the Theoretical Price, which indicates that part of the value of the company consists of "intangible value" apart from the actual earnings of the company.
Moving up to the highest scale, the display has some added features:
This is the best scale to use for very short-term trading. The first blue square and error bar after the last day of historical data is the estimated average price and volatility range for the upcoming trading day. (We define the average price to be the average of the high, low, open, close prices.) The estimated price and volatility range for the upcoming trading day for each stock are also shown in the Short-Term Trading dialog box, which is accessible anywhere in the program by right-clicking the mouse, or from the "sun" icon on the toolbar. These are useful for traders who want to time their trades intra-day to try to get a better price. The raw output of the Linear Prediction routine has been shown to have predictive power one day out, which is shown in the Short-Term Trading dialog box. For longer time intervals, the Price Projection must be smoothed on an N-day time scale, which results in the set of six technical indicators that we call the Harmonic Oscillator and Technical Indicators. These are useful for timing trades on a N-day time scale.
From the above graph, in the historical data the buy/sell points have been replaced by Candlesticks. These provide a graphical way to display the opening prices along with the high, low, and closing prices. The limits of the black line are the high and low prices for the day, whereas the limits of the colored bar are the opening and closing prices. If the close is above the open, the bar is green, and if the close is below the open, the bar is red. From this you can tell at a glance whether it was an "up" or "down" day. The differences between the closing and opening prices are also used in the Price Momentum technical indicator, along with the actual volume for the day.
Finally, by clicking the scale button three times, you can go down to the lowest scale, three factors of two lower in scale:
On this scale, each day of data occupies one pixel on your screen. This scale makes it easy to see the overall long-term performance of the stock at a glance. This is made possible because the whole four years of data are shown on one continuous graph. Once again, you can compare the performance (percentage rate of change of price) at all times just by looking at the slope of the graph.
It should be mentioned that on all graphs, you can move the vertical scale up or down to adjust the position of the graph. You can look at different parts of the graph corresponding to different times by moving the horizontal scale. On the horizontal scale, when you move the slider bar, the graph waits 1/10 of a second after you stop moving the bar, and then repaints the graph. It also adjusts the vertical scale each time you move the horizontal scale, to keep the graph centered in the view so that it doesn't "get lost". These features make it possible to display the entire price history of the stock in one continuous graph.
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