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Charts That Rule the World: a thinkorswim® Special Focus

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August 1, 2014

No doubt you can find lots of charting programs out there. But seriously, why look further? Other than a back massage, thinkorswim® Charts can do almost anything you’d need a chart to do–even if you’re not a chart reader.

And do you want to know a little secret? When the thinkorswim platform was first built, it didn’t have charts. It’s not that the development team couldn't build chart functionality. It’s just that as ex-market makers, we didn’t think to add them because we hadn’t really used them.

Then two things happened. One, customers started to ask for charts. And two, we figured out some cool chart functionality that would help traders who didn’t do technical analysis.

I won’t bore you with how to interpret the hundreds of technical studies or chart drawings the platform supports. You’ll find volumes of books on that subject. I want to focus on the stuff you may not have seen—the cooler stuff that’s easy to overlook.

Let’s shine a light on some of the features that chartists and non-chartists alike can use in day-to-day trading. These instructions will be based on the Charts page unless otherwise noted.

Overlays

An overlay is when you have two or more different stocks or indices displayed on the same chart. It’s a way to see relative performance—whether one is over-or under-performing another. It can be a measure of relative strength, and it’s also handy if you’re doing pairs trades. (See Figure 1.)

Here’s how you do it:

FIGURE 1: COMPARING NOTES.

Use the overlay function in thinkorswim, to compare two stocks, or in this case a stock to the SPX (pink line). For illustrative purposes only.

  1. Look in the upper-right-hand corner for the Studies button. Click on it, then hold the cursor over “Add Study” to see the expanded menu.
  2. Hold the cursor over “Compare With” at the bottom of that menu. You’ll see for example a list of default index symbols like DJX and SPX, as well as “Custom Symbol” at the top. If you click on one of the index symbols, or enter another symbol when you click on “Custom Symbol,” a chart for that symbol is overlaid on the chart.

For example, if you have a chart for DJX and you select SPX from the list of indices, an SPX line chart will be displayed along with the DJX chart. The vertical axis on the left-hand-side will be scaled for the overlay symbol so the high-and-low range fits on the same chart as the original symbol. That’s how the SPX, whose price is 10x the price of the DJX, can be displayed on the same chart. You can also go back to the “Compare With” menu and add more indices or custom symbols.

To take overlays one step further, click on the “Style” button in the upper-right-hand corner, then click on “Settings.” Now in the “Chart Settings” window, click on the “Price Axis” tab and check the “Show Price as Percentage” box. That switches the vertical axis on the left-hand side of the chart to show the percentage change each symbol has had from the first date on the left-hand side of the chart, to the current day. This makes it easier to compare performance of two symbols with different prices.

Backtesting*

You can test trading strategies based on technical indicators, and see the profit-and-loss performance right on the charts. The charts have what we call “Strategies,” which are simulated long-and-short entry and closing points determined by a technical indicator. You can code your own strategy, which is beyond the scope of this article, but I’ll show you how to get started. Refer to Figure 2 Below:

FIGURE 2: REAL TEST, FAKE MONEY.

Backtest a strategy first. Then view the entry and exit points on the chart, as well as a p/l before committing real dollars. For illustrative purposes only.    

  1. Click on the "Edit Studies" icon in the upper-right-hand corner.
  2. In the window that pops up, click the "Strategies" tab on the upper-left corner.
  3. On the left-hand-side you'll see a list of the default strategies available. To make the strategies "work," you need to add commands that will show both "long entry" (LE) and "short entry" (SE), at a minimum.
  4. For practice, look for the "BollingerBandsLE" and "BollingerBandsSE" strategies in the list. Those are the long-entry and short-entry commands based on Bollinger bands. Double-click on each one and it will be added to the list of studies and strategies on the charts in the main body of the "Edit Studies and Strategies" window.
  5. Click the "Apply" button in the lower-right-hand corner of the window, then the "OK" button.

You should see “BollingerBandsLE” and “BollingerBandsSE” labels on the chart, indicating simulated buying and selling 100 shares of stock based on the Bollinger Band test. To see the profit and loss of those simulated trades, place the cursor directly on one of the labels, and right click to open a new menu. Click on “Show Report” in that menu to open the “Strategy Report” window. There you’ll find the buy-and-sell signals, and profit-and-loss data for the strategy.

And by the way, if you want to buy or sell the chart’s stock shares for real, right click in the chart’s main body and select “Buy” or “Sell” from the drop-down menu. Plus, on the far-right-hand side of the chart window, you’ll see tabs for “Trade,” “Time and Sales,” “Level II,” etc. This lets you add windows with those features next to the chart window. That can basically set up charts as your go-to page for stock and futures trading needs.

Looking Into The Future

OK, not even thinkorswim has a crystal ball. But Charts let you see future dates to the right of the current date. This helps you locate upcoming earnings and dividend dates, for example, as well as helps you extend drawings like trend lines into the future so you can identify possible price targets. The process? Refer to Figure 3 below:

FIGURE 3: PEEKING AT THE FUTURE.

By adjusting the chart to stop 50 bars from the right (shaded area), you can view future earnings and dividend dates. Add a probability cone (pink curve line) to estimate the probability range in which a stock will trade prior to those dates. For illustrative purposes only.

  1. Click on the "Style" button in the upper-right-hand corner and click on the "Settings" choice in the drop-down menu.
  2. Click on the "Time Axis" tab in the "Chart Settings" window.
  3. Now look for the "Expansion Area" control. You can enter a number in the field for "bars to the right"—say, 50—then click the "Apply" button on the windows bottom-right-hand corner.

That will add empty space to the right of the current date on the chart (see Figure 3). Once you’ve done that, you can extend a trend line or other drawing into that space. Place the cursor directly on the trendline and right click. Select “Extend to Right” from the drop-down menu and you’ll see that line in those future dates.

A study that’s built specifically for those future dates is the Probability of Expiring Cone (Figure 3 also). This draws the upper-and-lower bounds of a stock’s or index’s price range that theoretically encompasses a level of probability.

One way to add the cone study is to click on the “Edit Studies” icon in the upper-right-hand corner and find “ProbabilityofExpiringCone” from the list of studies on the window’s lefthand side. Double click to add it to the list of chart studies. You’ll also find two fields to edit for the study. The “period” is the number of future dates for which the probability cone is calculated, and the “prob range,” is the probability the projected range covers. The default “prob range” is 68%, which corresponds roughly to one standard deviation. Set it to 95% to see a cone that covers two standard deviations, or 99%, to see a cone that covers three standard deviations.

These features really just scratch the surface of charting functionality. But hopefully you now have an idea of their scope and how to access them. Each of the described menus has other choices that lead you to other functions. Go ahead and continue to explore the charts to see just how hard you can make them work for you.

More on Charts, Please...

If you're looking for even more awesomeness to squeeze out your thinkorswim Charts, learn more at the thinkorswim Learning Center.