Unless you’ve been living on a desert island for 30 years, you’ve no doubt heard “alternative” used to describe music—a rock subgenre with a sound that ranges from simple and familiar to complex or completely foreign. There are also alternative technical indicators in trading—those considered out of the mainstream, yet rooted in the familiar riffs you likely learned with charting basics.
Here we’ll dive into four alternative technical indicators to add to your collection: on-balance volume (OBV), Average True Range (ATR), and from the TD Ameritrade thinkorswim® platform, Thermo Mode and Monkey Bars.
Joseph Granville created on-balance volume (OBV) in the 1960s based on his theory of price to volume. Granville believed that volume leads price, and that when volume increases dramatically without a corresponding change in price, it’s only a matter of time before price will increase (and vice versa). OBV can also be used to potentially spot the trend’s end when the indicator diverges from price (figure 1).
A weakness of this indicator is that it lacks a signal line or any established overbought or oversold areas. Consequently, it’s likely best used as a secondary, or confirming, indicator.
Average True Range (ATR)
Perhaps one of the most underrated alternative indicators is Average True Range (ATR), which measures the volatility in a stock by taking its range—the distance between the high and low in the time frame under study—and then plotting that measurement as a moving average.
ATR will tend to move when volatility increases and flatten when it contracts. But the true power of this technical indicator is its ability to signal potential buy points and then create trailing stops (predetermined chart points to set an order to exit the trade). Because trailing stops are based on volatility, they respond dynamically to changes in price, making it less likely (although not guaranteed) that you’ll be stopped out prematurely during a move.
ATR is a volatility indicator, not a directional indicator. If you’re not using it to set trailing stops, it, too, is best used as a secondary indicator that can confirm the enthusiasm—or lack thereof—for range breakouts.
Thermo Mode, a proprietary TD Ameritrade feature, offers an alternative way to view and interpret other indicators.
Graphic and customizable, Thermo Mode uses color streaks at various intensities to identify and display readings in indicators such as the Relative Strength Index (RSI) (we tackled this technical indicator in part one). Users can display the values of a plotted contract—based on the underlying indicator—with numerous look-back periods. Thermo Mode assigns specific colors to the lowest and highest values.
When you first enable Monkey Bars, another of TD Ameritrade’s proprietary charting modes, you might think that alien crafts have landed on your screen. But interpreting this unique display will become second nature after some practice.
Monkey Bars can quickly highlight key price trend reversals, areas of momentum, and sideways price action. However, because the indicator is based on real volatility, it’s best used on liquid stocks and only during regular market hours. It’s also very useful for analyzing widely traded futures.
How to get there? Users can fully customize the look and feel of the Chart Settings tab. To apply any desired changes (including Monkey Bars), navigate to Style > Settings > Appearance.
Monkey Bars show how much total volume has traded at different price levels, as well as the number of trades at those price levels (figure 4). The number of trades differs from total volume in this case because a trade of 100 shares and a trade of 1,000 shares is still counted as two trades, but total volume for those trades is combined in this case—1,100 shares.
These two factors are also combined with a time factor and create a type of Venn diagram showing how these three inputs interact with each other (figure 5).
Editor's note: Find yourself with a little down time this holiday season? That's prime time to advance your trading technique by exploring charting and technical indicators. Read part one, covering charting indicator basics. These articles first ran in June 2015.
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