“Everything should be made as simple as possible, but not simpler.” -Albert Einstein
Nowadays the stock chart becomes more and more crowded with indicators as the charting software technology basically allows you to add anything you would like. I have seen many stock charts on the websites with literally hundred lines/indicators. I was also a big fun myself long time ago. As a matter of fact, about 10 years ago I spent lots of my free time in programming to make these kinds of charts. However, now I cannot watch these kinds of charts without blowing my mind up. Maybe I am too old to absorb too much information at one time.
A fairy tale was told in the book “The Adam Theory of Markets by J. Welles Wilder Jr. “- A market theory expert was so sure that a stock should go up per his complex market theory, so he bought the stock. However, the stock went down almost daily after he bought it, so he was very puzzled and dismayed. One day his 5 years old daughter came to his office and saw her dad unhappy and asked why. He told the girl that his theory tells him the stock should go up, but it goes down and down. The girl looked the lines on the computer screen, “Dad, this line goes down”. “You don’t know the theory, my dear, this stock should go up to here according to the theory…” the Dad said. The girl seems very confused, “I don’t know the theory, Dad, but I see the line goes down…”
All of the sudden, the market expert seems realized something and he immediately sold everything and even went short on the stock…He made a fortune. He became a total different person, instead of spending hours and hours in his office studying the market theory, he was often seen with his family playing golf…
The author, Mr. Wilder was a mechanical engineer, and he is the one who developed all the indicators such as Average True Range, the Relative Strength Index, Directional Movement and the Parabolic Stop and Reverse. It seems that Mr. Wilder gave up all the indicators he developed, and to “just simply looking at the clear and simple picture to find the trend”, as even a 5 years old can do…
I came from long way to realize that trading is not a contest of making charts more complicated. The stock moves up and down, and lots of days are just noises. Analyzing noise data to make conclusions is just waste of time.
What I want now is a simple and clear picture of the stock. So I will do the opposite of the majority of people, instead of making the stock charts more complex, I will make my stock charts simpler.
The long term zigzag view of SPY is updated everyday in my blog. The picture looks like this:
With the picture above, I know exactly the critical levels for SPY or the general market. If the SPY closes below 105.89, I would be cautious. If it closes below 103.56, I would be …oh well, you can guess. With this simple picture, even my 9 year old son knows it is in uptrend.
This simple ZigZag plot eliminates all the noise data. For example, look at the last 200 days of GOOG, the zigzag plot only use 6 days data if we use 5% change to find the peaks and valleys. It amazes me that only 6 days data needed to have a big picture for GOOG’s 200 days.
Even using 3% change, it only requires 18 days of data:
Based on Zigzag plot, you can also easily visualize the breakout line or trend lines:
Well, you might say this is too simplified. You want to see the candlestick chart with the zigzag view like this:
I still like to eliminate the noise days (such as the low volume days), then the above chart becomes:
It is easy to find out that AMZN had lots of green bars before the last October breakout.
As this is inspired by the Adam Theory of the market, I will call this kind of chart “The Adam Theory Chart”.
So the Adam Theory Chart for F will be like this:
By eliminating the noise days, it is easy to see F’s short term top near the end of July 2009 as we saw two big red candles, and breakout near Nov 18, 2009 two big green bars just above the breakout price. All the candles in the Adam Theory Chart are above average volume. All the days with below average volume are just noise days.
Make your life simpler, start with making your charts simpler using The Adam Theory Chart.
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