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Price Charts Are For Traders – Investors Should Look At Rate Of Change

Depending on timeframe different charts are suitable but in the case of investors, rate-of-change in the quarterly or yearly timeframe may be more useful.

Many permabears use compressed linear scale charts of stock indexes in an effort to create an artificial image to attack. Obviously, many investors are not fooled but they usually manage to disorient quite a few.

I cannot overemphasize this: different timeframes require different charts or no charts at all. Below is a table that summarizes chart suitability.

Timeframe Chart type Operating Method
HFT No charts Order book algos/ML
Intraday Tick/Candlesticks Order book algos/ML/TA
Swing/Position Candlesticks TA/ML
Momentum Closing prices TA
Investors Rate-of-Change Strategic/Tactical

*ML: Machine learning  TA: Technical analysis

Below is a quarterly chart of S&P 500 since 1941 with 40-quarter rate-of-change shown at the indicator pane.

Focusing on prices in an effort to deduce what happens next is irrelevant and confusing. On the other hand, looking at the 40-quarter rate-of change for example may provide a better indication of the state of the market.

For the above choice of rate-of-change, the value is 291.75% and that is below levels reached in the 50s and much below levels realized in the 90s.

In fact, the rate-of-change provides a better chart for the market in the case of longer-term investing than looking at price levels. Price levels are the outcome of a multiplicative process. New highs do not necessarily indicate a bubble as most permabears think but strength and momentum.

The rate-of-change is also used in cross-sectional momentum strategies and it has been shown to provide a good ranking method for buying on strength and selling on weakness.

Summary: Price charts do not offer much value to longer-term investors. Rate-of-change charts may provide better information about the state of the market.


Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting and backtesting program: Amibroker. Data provider: Norgate Data

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