What is Thinkscript? Thinkscript is the code used by TD Ameritrade’s Thinkorswim to display indicators, or other tools on your trading screens. The beauty of Thinkorswim is that (like other brokerage platforms) they allow you to code your own indicators to do specific things that you would like. Thinkorswim calls their code “Thinkscript”. Cheeky, right?
Now, I am not a huge fan of indicators. In fact, I despise most. To me, most indicators are too slow and lag too much to have any accuracy or relevance.
What matters most in trading is price. If you can consistently buy them at 5 and sell them at 10, it doesn’t matter what method/indicator you used. For all I care, if you use the changing of the stars or flip a coin to make your trades (if it helps you be consistently profitable) keep doing that.
That said, there is one tool that I think could dramatically impact your trading for the better. It is so simple too, that I am surprised most people haven’t considered it as a part of their trading style. Before I get into it, let’s review some important things.
Trading Is About Ranges
More often than not, a Stock or a Future’s Contract is going to fluctuate within a specific range each day, week, month, and year. The longer the timeframe, the wider the range that you can expect. In other words, an 80 point range in the S&P Futures is much more likely to occur on a monthly timeframe, more so than on a daily timeframe. Wouldn’t you agree that? There’s a higher probability that that would be the case.
So what’s the significance? It’s this: don’t expect to make 80 points day trading the S&P Futures.
“Well gee thanks, pal. Could have guessed that one, right?”
If you’ve had much experience trading, yeah.. you probably know that. But how much of a range should you be expecting in any given Stock or Future, for that matter? The range is different each day. How do you know (in each moment and tick of the market) what the range on the day will be?
Even on a trending day, the market is only going to move so far. What tool can we use that will help us gauge (ahead of time) what the range is likely to be?
Solution?… Our Range Predictor Thinkscript
What we did is take information from the Options Market to make decisions in trading outright Stock and Futures. In the Options Market, you have something called Implied Volatility (IV). Implied Volatility is one of the inputs of an Options Contract responsible for how much or how little premium there is in any given Options Contract.
The Implied Volatility is a measurement of the future expected volatility in an underlying Stock or Futures Contract. If Market Makers are expecting higher volatility, Options prices will go up. It should be noted that volatility and price range are nearly synonymous.
So if we ditch the theory on Options and look specifically at what Implied Volatility can do for us, you can structure your trading expectations in accordance with a Stock/Future’s Implied Volatility.
Our Thinkscript is a simple to install piece of code that you can input into your Thinkorswim platform. The code will display on your screen to serve as a reminder of what the expected 1 Standard Deviation move on a Daily, Weekly, and Monthly timeframe is expected to be. It’s not a Holy Grail, or some voodoo. It’s just math. The best part? Find out here.
Here’s a screenshot of what the tool looks like:
Our tool also displays the current range on the day. It’s an easy reminder that is constantly within your eye’s line of sight.
Still Not Convinced? This Is Our Thinkscript’s True Power
We’ve established that the tool measures what the 1 Standard Deviation range on a Stock or Futures Contract is expected to be. We’ve established that it’s based on hard math, and not voodoo.
However, no tool is 100% accurate, and neither is this one. The tool measures the expected 1 Standard Deviation range, which means that there’s a 68% chance that price stays within that range (1 SD = 68%).
Here’s the significance. If price has already moved to the outer extreme of that range, we can predict (with 68% odds) that price will likely not exceed that range too much more, and may even look to fade (go against / be a contrarian) at these extremes.
In other words, it helps you buy low and sell high.
This means better trade location (better risk:reward) potential for you. At how cheap this tool is, it would be silly not to add this to your trading kit… especially considering it might save you from making some terrible trades.
Trading Is About Taking Profits
Going back to our earlier example of the S&P Futures, this tool is not an ATR (Average True Range). The thing I hate about indicators is that you have to fiddle with time horizons, and how many bars the indicator needs to look back in order to analyze price. Are you supposed to look back 20 bars for the most accurate data? 30? 50? 100? Which is it??
As I already described, you are having the Market Makers do all the work for you. They are calculating the Implied Volatility in real-time. In other words, our thinkscript updates in real-time to provide you with the most accurate, and relevant information.
Moreover, look at the screenshot of the tool up above. Goldman Sachs was expected to have a move of $3.42 on the daily timeframe. It ended up having a move of $3.57. However, what do you think the odds are that you make the entire range in profit? They’re pretty low.
That’s not to contradict my statement on how this tool helps you buy low and sell high. It helps you identify possible turning points, while setting reasonable profit targets that have a higher probability of being hit.
This tool will help you to better gauge your profit targets, so that you limit the amount of times you have a winning trade that turns into a loser. I can’t tell you how many times I’ve done that, how many I’ve had a winning trade turnaround into a loser all because I held it for too long and my profit targets weren’t reasonable. I’ve lost count of how many times that has happened.
Good Trade Location – Reasonable Profit Targets
Those are the two things this tool does: Find good trade location to either initiate a trade or get out of a trade, and set reasonable profit targets that have higher odds of being hit.
As I said, you’re basing your decisions on the expected 1 SD move with this tool. It isn’t a holy grail. It certainly won’t guarantee you’ll make money, nor will guarantee you won’t lose money. Those would be idiotic claims that might get us sued. So I’m not going to make those claims.
That said, it is a great tool that provides highly relevant, and up-to-date information on which you can base your own trading decisions on. Like I said, with such low risk to you relative to what it could possibly do for you, you would have to be insane not to have this thinkscript.
What are you waiting for? Click on the link above, and get your risk management under control.