Trading Stocks Using Heatmaps

[Do Or Die 10]

Heatmaps give you a clean visual representation of what sectors are hot, where people are selling, or how the overall market is reacting. These allow you to view the entire market at a glance and provided by major exchange websites. Many people tend to overlook the convenience of a stock market heat map, but they can be the single most important tool for Relative Strength based strategies.

 

Heatmap is a visual representation of the entire market, indicating by use of colors the performance if important market components. They are represented as a big grid that breaks down individual sectors and stocks. Each stock is given its own rectangle or square.

 

You can draw a lot of information by just watching which areas are going red, which are going green and which remain close to white:

1. Heatmaps are great for spotting what is moving in the market. For example, in the Excel heatmap you can see that most often Financials lead the market; i.e., if the market is up, Financials outperform and if the market is down, they underperform. Similarly Utilities/Healthcare lags the market; they tend to advance the least on up-days and decline the least on down-days. Using this information you can trade Financials on days which you want to be aggressive, while trade Healthcare on days when you want to be defensive.
   
    
    
    
   
2. Heatmaps allow you to see trends that are developing. For example, in the Excel heatmap you can see that market turned bullish supported by all sectors on 4 days back (Day-4). Similarly in Dow components map you can see in a glance that INTC, GE and IBM are top performers. You can also see PG shooting up hysterically and hence has increasing probability of retracement. Such observations allow you to avoid buying at the top of a spike or buying in a stock which hardly moves up.
   
    
    
    
   
3. Within a stock group you can easily determine which move fastest, which are more trending and which move little with respect to the market. For example, say you have decided to trade in Healthcare and come down to major drug manufacturers. It is easy to see that BMY, ABT and MYGN are stronger candidates for buying. JNJ and PFE moves hardly on up-days but goes down with the market on down-days, so they are candidates for short.

 

 

 

Drawing Heatmap in Excel:

 

Click on ‘Conditional Formatting’ in the ‘Home’ tab on the top ribbon. Next go to ‘Highlight Cell Rules’-> ‘More Rules’. Here you can ‘format all cells based on their values’ by using a 3-color scale.

 

Heatmaps can also be drawn in Ninjatrader and Amibroker.

[nadavush 10]

Thanks for the share!

I was just reading up about heatmaps and what they can do, so cool! couldn't resist showing one example in the link.

[stockblitz65 10]

I love using HeatMaps - thanks for the article.

Last year I downloaded an App on my iPod called Heatmap by Ivory Bull, and use it all the time and it continues to add cool funtionality.

Heatmaps are a crisp way for me to view market volume patterns and stock movements and help me spot when volumes and price align to create momentum.