Plan Ahead: 3 thinkorswim® Tools for Probability Analysis

It’d be great if you could get a peek at next year’s stock prices so you can buy below that price and sell above it. But that’s a fantasy. You can’t see how the stock market might perform in the future, but that doesn’t mean you can’t make any decisions. There may be some hints about what the market is cooking up. How do you find them? Here are some thinkkorswim probability analysis tools that might help inform your decisions about future trades. Let’s try to unlock the mystery. 

Expand a Chart Area

When you look at a stock’s price chart, the current day’s data is usually on the right side. Of course, there’s no way to fill in future days with price data. But on the thinkorswim platform, you can expand the chart to plot future dates to the right of the current date. The expanded earnings chart can’t predict the future, but it can show upcoming earnings and ex-dividend dates, and you can extend drawings like trendlines into the future.

To do that, go to the Charts tab > Style > Settings... to open up the Chart Settings box (see figure 1). 

From the tabs on the top of the Chart Settings box, select Time Axis. There you’ll find the Expansion area: __ bars to the right control. This is the key to unlock the tools. 

The number of bars you enter will be the number of future days the chart will display. You won’t see any price data, but it’ll give you room to display other information like probability, earnings, dividends, and options prices. In figure 1, the chart is set to show the next 60 days. Now that you know where the fun stuff is hidden, let’s put it to work.

Probability Analysis Using thinkorswim Charts

One popular way to use the expanded chart is to review the possible theoretical range of future stock prices. Pull up a chart and select Studies > Add study > Volatility Studies > ProbabilityOfExpiringCone. This displays a probability cone on the right side of the chart that gives you an idea of where the stock price might be in the future (see figure 2). The cone, which is a standard deviation bell curve, combines the current implied volatility of the options of an underlying stock with the number of future days displayed, then shows the upper and lower range of prices where the stock might theoretically land 68% (default value or one standard deviation) of the time for each expiration Friday. Price could be above or below the cone 32% of the time.

By default, you’ll see upper and lower numbers corresponding to future options expirations. But you can also scroll over the probability cone line to highlight a specific date and see the upper and lower prices for that date at the top of the chart.

The probability cone is for informational and educational purposes only and is no guarantee the stock price will be inside that projected cone at a future date. But it provides some context for bullish, bearish, or neutral biases. 

For example, let’s say you’re looking at a stock that’s $180, and you have a hunch it might rise to $210 in three months. First, set the number of bars to 90 days or more. Then, using the 68% probability cone, you might see that it has an upper value of $225 and a lower value of $140 in 90 days. Your $210 target is within the upper and lower boundaries of the cone, which means it’s within the stock’s 68% theoretical range. That’s not to say the stock will rise to $210 in 90 days, but there’s a 68% chance it could.

The probability cone is set to 68% by default, but you can edit the study to show any percentage up to 99%. Try setting it to 95% to see a cone that covers two standard deviations or 99% to cover three standard deviations.

How to See Future Earnings on thinkorswim Charts

Next, let’s look at how to show future earnings on thinkorswim charts. Go back to the Chart Settings box, select the Equities tab, and check Show Corporate Actions. This will display upcoming earnings calls and dividend dates in the expanded chart area (see figure 3). Blue lightbulb icons indicate upcoming earnings announcements, red phone icons indicate conference calls, and green dollar icons indicate ex-dividend dates.

How can this be helpful? Some stocks can exhibit increased price volatility before and/or after earnings announcements. If a stock beats or misses expected numbers, its price could have a big move up or down, with a similarly big impact on a potential trade. If you hover your cursor over the blue question mark or red phone icons, you’ll see the date and time (typically before the open or after the close of trading) of earnings releases. This will help you adjust your strategy accordingly.

So, these handy tools may not show you what price will be in the future, but they can provide context for potential trades. After all, trading is all about what might happen in the future. These charting tools on thinkorswim just might help you envision that future a bit more clearly.