Getting Trading Edge and Idea

by

Diamondwise Charting and Sorting

By Dr. Jay “EdgeMe” Ye

http://yesInvests.com

Copyright © 2010 by Jay “EdgeMe” Ye, All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise, without the prior written permission of the author.

The author has used his best efforts in preparing this book, and the information provided herein is provided "as is." The author makes no representation or warranties with respect to the accuracy or completeness of the contents of this book. Under no circumstances shall the author be liable for direct, indirect, special, incidental, or consequential damages resulting from the use, misuse, or inability to use this book or the software associated with this book.

The product names and services known to be trademarks, registered trademarks used throughout this book are in an editorial fashion only.

http://yesInvests.com

V0.1, updated in 12/30/2010

Show me the charts, and I'll tell you the news.

- Bernard Baruch

Table of Contents

1. Introduction2. Good and Bad Behaved Stocks3. The UP and DN Numbers4. The Hint and RV Numbers5. Look Thru Many Charts Without Typing the Symbols6. Spatial Searching7. Hint Searching8. RealTime/Intraday Support

Introduction

This Excel-based tool has two major functions; one is diamondwise charting, another is spatial and hint searching;

I also call this tool “The ideas generator”, because it can find many trading ideas/opportunities for you.

What is diamondwise charting?

To answer this question, I’d like to present a geometry problem:

In triangle ABC, let D be the midpoint of BC. If angle ACB=30 degrees and angle ADB= 45 degrees, find angle ABC.

Try to solve the above the problem, the answer will be presented near the end of this article.

I don’t know about you. I cannot solve this geometry problem without drawing auxiliary lines. I still remembered in my middle school years. Many times, I got stuck on a geometry problem. However, after my teacher drew some auxiliary lines, I knew the answer right away, “Ah-ha”.

I like to call “auxiliary lines” as “helper lines”.

These helper lines will give you the “Ah-ha” moment.

Diamondwise charts are charts with “helper lines”. There are two sets of parallel helper lines in the plot, one is up slope helper lines, and another is down slope helper lines. These two sets of lines form many diamonds (That’s why I called them “diamondwise” charts). Below is an example of diamondwise chart for SPY:

The price and time space is divided into grids of diamonds. The size and the shape of the diamond (the slope and distance of these helper lines) are determined by the behavior of the stock.

Good and Bad Behaved Stocks

Stocks are like people. Some people are good people, while some others are people with bad behavior. You want to be surrounded by good people, just like you like to play with good behavior stocks.

Look at the two stocks (FSLR and NFLX):

FSLR moves all over the places, while NFLX moves nicely within 2 channels; FSLR is an example of a badly behaved stock. On the other hand, NFLX is a good behaved stock.

The ISRG is also a good trending stock, it moves down within 2 channels.

AMZN is also a stock with good behavior. Its movement (down and up) are mostly within channels.

The diamond edges can be supports or resistances, i.e. both up slope and down slope helper lines can be support or resistance line. The lines above the current price are resistance and lines below the current price are support lines.

The UP and DN Numbers

• UP number: The distance to the critical UP trend/helper line. If it is above the UP helper line, then the number is positive, otherwise it is negative number

• DN number: The distance to the critical DOWN trend/helper line. If it is above the DOWN helper line, then the number is positive, otherwise it is negative number

For JNY, the distance to up trend line is 3 (UP=3, 3 is normalized number, no unit), and the distance to down trend line is 6 (DN=6).

You can also think of UP and DN numbers as trends:

• UP number: the longer term trend, positive number means up trend, negative number means down trend

• DN number: the short term trend, positive number means up trend, negative number means down trend

For example, MEE’s chart shows UP= -1 (longer term is still negative, i.e., down), and DN=12.(short term, the UP trend is very strong)

INTU’s UP=2, DN=4, both long and short term trend are up:

You can use UP and DN numbers to rank/compare two stocks to see which stock is better. On Dec.29, 2010, AAPL (UP=4, DN=2) is better than GOOG(UP=2, DN=1) in terms of trending strength:

You can also use UP and DN numbers to find the stocks with the similar spatial pattern. In “Spatial Searching” section below, I will describe how to search stocks using UP and DN numbers.

The Hint and RV Number

A “hint day” is a day when a stock shows one of the following:

• Price closes up or down over 1.5 normal daily range (StdDev)• Large white candle or Black candle body • Very high volume • Break Up (at/near the highest peak) or Break Down (at/near lowest valley)

A "hint" just tells us the stock may worth further research. The same kind of “hint day” may have different meanings in different trends or price zones. For example, a “hint day with high volume big white candle” in a down trend stock may hint trend change, while the same “high volume big white candle up hint day” near trading range may means a break up for the stock.

Numeric numbers are used for Hint for easy searching. The hint number is defined as

• Hint = 1, the stock’s open to close (white candle body) is over 1 stdDev• Hint = 2, the stock move up over 1.5 stdDev• Hint = 3, the stock had hint=2 or 1 within last 5 days• Hint = -1, the stock’s close to open (black candle body) is over 1 stdDev• Hint = -2, the stock move down over 1.5 stdDev• Hint = -3, the stock had hint =-2 or -1 within last 5 days• Hint = 0, normal stock fluctuation days

RV, relative volume, is defined as current volume divided by 20 days moving average volume. RV is used to determine the strength of the hint. When we have Hint =2, we also want to see RV > 1.

Below are recent Hints for CERN:

When you are looking for low volume pullback, you can look for Hint=3, RV<1

Below is a “buy on dip” (Hint=3, RV<1) example for BDX

In summary, we believe every big trend starts with a hint day. The best traders search only for the very best opportunities when their trading methods have an edge. You have to let the market give you a “hint” before you act.

If you don’t want to miss the best opportunities, you have to scan the “hints” on the list of stocks everyday. In the “Hint Searching” section, I will describe how to scan stocks using Hint and RV numbers.

Look thru Many Charts Without Typing the Symbols

I have to look through many charts each day to search for opportunities. To me, it is too tedious to type in stock symbols every time I want to see them. This is one of the motivations for me to develop my own charting software.

In the diamondwise Excel file, there is a sheet called watchlist. A list of stocks that I am interested in could be stored in Column A. All you have to do is move you mouse into the Column A, then use the arrow down key or simply hit Enter. The diamondwise chart for the selected symbol will be drawn. In that way, you can go thru all the stock charts without typing symbols.

Of course, if you like to type the symbol, just type the symbol in cell B1, then hit the enter key, the diamondwise chart will be shown.

If you want to have more watch list sheets, just go to Edit menu, choose Move or Copy Sheet. That way, you can organize your watch list or positions very easily.

Spatial Searching

You can search stocks per their UP and DN numbers. You can easily find stocks in certain spatial diamonds.

Go to Sorting sheet,

1. Click the Update button to calculate UP and DN numbers for each stock. Please note this button only needs click once unless new stock data have been downloaded again.

2. Type the UP and DN number into C1 and D1 cells.3. Click Spatial Sorting button

The stocks which met your UP and DN numbers will be left shown, other stocks will be hidden.

For example, the following screen shows UP=2, DN=2, all stocks with UP=2 and DN=2 will be shown.

In the C1 and D1, you can also use > or < in addition to the numeric value,

For example, you can type >1 in C1 cell, than >2 in D1 cell; that means you want to search for stocks with UP higher than 1, and DN higher than 2:

Just click the symbols on Column A, the diamondwise chart will be drawn.

As indicated earlier that UP number is really longer term trend and DN number is the short term trend.

One scan I always like to do is find long term trend is UP (UP>1) and the short term trend is just break out the short term downtrend line (DN=1).

For the above scan, all I have to do is to enter >1 into cell C1 and 1 into cell D1:

The chart below shows the recent scans (UP>1 and DN=1) for ROVI:

In summary, just remember Cell C1 is for UP number, D1 cell is for DN number. You can do all kinds of spatial searches. It is really all up to your imaginations. With these kinds of scans, you will be surrounded by good stocks; you will have more chance to be correct.

Hint Searching

Hint number is entered in E1 cell, and RV number is entered in F1 cell.

Some typical searches I will do are:

• Hint=2, RV>1; search for stock up over 1.5 stdDev with above average volume

• Hint=1, RV>1; search for stock with big white candle with above average volume

• Hint=-2, RV>1; search for stock down over 1.5 stdDev with above average volume

• Hint=-1, RV>1; search for stock with big black candle with above average volume

• Hint=3, RV<1; search for stock was up big, then pullback on light volume• Hint=-3, RV<1; search for stock was down big, then rally on light volume

When the market is in buy mode (use our Bulls vs Bear Model), you may search stocks from the big white candles (Hint=1) or big mover (Hint=2) with higher volume (RV>1). If you like to buy on the dips, then use search with Hint=3, RV<1.

For example, just enter the condition 2 into cell E1, and >1 into cell F1, then click Hint Sorting button, only stocks met your conditions will be shown:

When the market is in sell mode, you can search stocks have Hint=-1 or Hint=-2 with RV>1. If you like to sell short on low volume bounce then Hint=-3 with RV<1 is a good scan for you.

Once you find a list of stocks met your search condition, you can click Open FinViz button, then move your mouse to select the list of stocks, then click OK. It will open Finviz website and plot the list of stocks.

RealTime/Intraday Support

All the above examples are used with end-of-day stock data.

If you have the ThinkorSwim application, then you can get realtime data from Thinkorswim into your Excel sheet.

In the Datasource sheet, choose Use Real Time Data and the click “Get RealTime from TOS” button,

Now all your charting and sorting are based on realtime mode.

All the diamondwise charting will be based on end-of-day data up to yesterday and real time current price and volume for today.

You can also search for Hint and Spatial in real time mode. Therefore, this tool will generate lots of ideas for you to trade real time.

When using real time mode, make sure to adjust the RV number, I normally search for Hint 2 with RV>0 (or RV>0.3 when it is at noon time, or RV>0.9 near 3:40PM, it is all up to you)

Lastly, please note, in the real time mode, you will have to click Update button every time you want to search for Hint or Spatial, because the stock data has been updated.

Good luck and Happy Trading.

Disclaimer(1) I am NOT a professional financial advisor. I do NOT advise you to buy or sell any thing at any time. You make your own decisions. (2) The ideas generated by this tool are not investment advice. It is only for educational and entertainment purposes. (3) Trading/investing involves risk of losing capitals

Answer to the geometry problem:

Add point E at the middle of AC, and add point F so that AFB is a right angle. Add auxiliary lines AF, FB, FE, and ED.

Now triangle AFE is an equilateral triangle, and triangle FED is an isosceles triangle.

Angle AFE is 60, thus angle EFB is 30, then both angle FED and FDE is 75, then angle EDC is 105 degree. Because line AB and ED is parallel, so angle ABC is equal to angle EDC, which is 105 degree.