Simpler Options. Indicator guide. An informative reference for John Carter s commonly used trading indicators.

Transcription

1 Simpler Options Indicator guide An informative reference for John Carter s commonly used trading indicators

2 At Simpler Options you will see a handful of proprietary indicators on John Carter s charts. This purpose of this guide is to give you a general understanding of each of those indicators and how they work. For illustration purposes, we will be using the ThinkOrSwim charts since this is our preferred option trading platform. The first five indicators are built into the ThinkOrSwim platform and provided to all TDAmeritrade account holders at no additional cost (TDAmeritrade acquired ThinkOrSwim in 2009). If you already have the platform installed, the indicators can be found on your chart by clicking Studies > Add Study > John Carter Studies and then selecting the appropriate indicator. If you wish to open a new account, you can do so by going here: Once your account is open, you can download the ThinkOrSwim platform by going to the following link: The Squeeze Indicator

3 The Squeeze indicator attempts to identify periods of consolidation in a market. In general the market is either in a period of quiet consolidation or vertical price discovery. By identifying these calm periods, we have a better opportunity of getting into trades with the potential for larger moves. Once a market enters into a squeeze, we watch the overall market momentum to help forecast the market direction and await a release of market energy. The red and green dots along the zero line indicate if there is a squeeze. A red dot means there is a squeeze condition in effect. A green dot means that we are not currently in a squeeze. The first green dot after one or more red dots is where the squeeze is said to have fired. The red and blue histogram indicates momentum. If above zero momentum is increasing, the histogram will by light blue. If above zero momentum is decreasing, it will be dark blue. Inversely, the histogram will paint yellow or red to portray increasing or decreasing momentum below the zero line. (The yellow arrows show the formation of 2 squeezes with corresponding momentum readings.) The Squeeze indicator was built from 3 components. The first two are Bollinger Bands and Keltner Channels. These are what trigger the red and green dots. When the Bollinger Bands (above in cyan) go inside of the Keltner Channel (above in red), the market is said to be in a squeeze. The dots across the zero line of the Squeeze indicator will turn RED, signifying this period of market compression. Once the Bollinger Bands expand and again move outside the Keltner Channel, the dots will turn GREEN, signifying that the squeeze has fired.

4 The final component of the Squeeze indicator is a momentum indicator. Once the Bollinger Bands move outside of the Keltner Channel, a Squeeze has fired. In order to determine the direction of the move, we then look to the momentum. If it is above zero, the squeeze has fired long. Inversely, a short squeeze would be signified by negative momentum. The image above shows the technical indicators that make up the squeeze indicator. We have simplified this study with the use of red and green dots and vertical momentum bars. The Waves Indicator The ABC and Combo Waves were built by a third party developer from an algorithm comprised of various moving averages and oscillators. The idea behind the waves is to visualize the overall strength and direction of a given market across multiple time frames. There are 3 separate waves that make up the ABC Waves. The A Wave measures short term relative strength and direction of a market, the C Wave measures longer term strength and the B Wave plots the same for a medium time period. The Wave indicator built into ThinkOrSwim is often referred to as the Combo Wave. It is a combination plot of the short-term A wave and the longer-term C wave. By default, the indicator will look like the image below.

5 One trick that many users prefer is to separate the A and C waves and create two separate indicators. To do this, simply add the Waves (listed as TTM_Wave) to your chart twice. Next, click the Edit Studies icon on your chart to bring up the window in the image below. On the first Wave indicator, select the tabs for Wave2High and Wave2Low and uncheck the box that reads Show Plot for each. After you have done this, select the second Wave indicator and click the tab for Wave 1. Uncheck the Show Plot box just as you did on the other indicator. This will create one wave indicator that shows only the A Wave (Wave 1) and another to plot only the C Wave (Wave 2). Once you have done this, simply click OK to apply these settings to your chart. The finish product should look like the chart on the following page. The C Wave is often viewed as the anchor for the market. If this wave is clearly positive with all bars above the zero line, we would avoid short trades as this is an indication that the overall momentum of the market is long. The opposite would also be true if the wave was clearly negative. The A Wave is much shorter term in nature and therefore will shift between positive and negative readings more often. The highest probability trades are when both the A and C waves are on the same side of the zero line, showing that short and long-term momentum is in agreement and a trend is in place. John Carter will often look to the waves for confirmation when using the Squeeze indicator. If an instrument is in a squeeze

6 and you are trying to forecast the direction of a pending move, the Waves can be a very helpful indicator. More often than not, the squeeze will fire in the direction of the Waves for the corresponding time frame. (TTM_Wave separated into A and C Wave components) The Trend Indicator The Trend (listed as TTM_Trend in ThinkOrSwim ) is our take on the Heikin-Ashi bar. It is essentially an easier way to look at candlesticks. Heikin-Ashi, meaning average bar in Japanese, is a candlestick technique designed to improve the isolation of a trending chart pattern. Using the Trend is a visual technique that eliminates the irregularities from a normal candlestick chart and offers a better picture of trends and consolidations. The idea behind this indicator is to prevent traders from getting shaken out of good trades by a few counter trend bars. Instead of painting each candle according to whether price action moved up or down, the Trend paints candles based on the bigger picture trend.

7 More precisely, the indicator calculates the overall range of the last six bars. If the closing price of the current bar is ABOVE the midpoint of this range, it will paint blue (or whichever color you designate for positive bars). If the bar closes BELOW the midpoint of the range, it will be painted red. By painting the price bars in this manner, traders gain the advantage of quickly seeing where price is trading in relation to the current trend. Linear Regression Channel (LRC) The Linear Regression Channel was designed as a trend-identifying reversion to the mean indicator. Based on the short-term trend of the market, lines are created at 1 and 2 standard deviations outside of the current price based on a 35-period average. The middle line (black in the picture below) is the linear regression line that best fits all the data points of interest for the period. The upper and lower channel lines (red and purple in the picture below) run parallel to the linear regression line by one and two standard deviations. The inner channel represents one standard deviation and contains 68.2% of price data. The outer channel is two standard deviations away and comprises 95% of all prices for the designated period.

8 The Scalper Indicator The Scalper is a visual way to help determine whether to buy or sell against a pivot level. The indicator paints up and down arrows representing a pivot high or pivot low after three bars close higher or lower. It is important to remember that the arrow plots appear only AFTER three consecutive higher or lower closes. The Scalper can be applied to any time frame chart.

9 The Reversion Bands The TTM Reversion Bands are an indicator designed for reversion to the mean trading strategies. A dynamic channel is plotted a set number of standard deviations from a moving average. The idea is that prices near the reversion bands are extremes that will naturally regress to the mean over time. Depending on the trader s directional bias, he would look to fade the upper or lower reversion band, i.e. sell near the upper or buy near the lower, with anticipated targets at the mean and potentially the opposing reversion line. The Reversion Bands are not part of the ThinkOrSwim platform by default. They are an add-on available from Simpler Options. Below are John Carter s personal settings for both intraday and daily charts. Intraday: Daily: ATR length = 25 ATR length = 13 EMA length = 25 EMA length = 13 Displace = 0 Displace = 0 Multiplier = 2.5 Multiplier = 1.5

10 The VooDoo Lines The Voodoo Lines is another add-on premium indicator available for purchase from Simpler Options. The lines serve to uncover hidden levels of possible support and resistance. We call them Voodoo Lines because the underlying techniques are based on Fibonacci analysis and Elliott waves. The Voodoo Lines take advantage of these powerful analytical techniques in a way that overcomes one of the most commonly cited problems with Elliott waves: analysts disagree with the current wave count. Instead, we use long-term waves that have already completed. By consistently choosing the appropriate swing points from those waves, and then calculating the Voodoo levels from them, we plot support and resistance levels that stay in the same place. Because each symbol needs to be individually analyzed to be included in TTM Voodoo Lines it won t work on every security. The base product comes with support for a number of Stock Indices, Futures, Index ETFs, and forex pairs. The levels are automatically adjusted when the long term wave structure changes. Voodoo Line levels for over 150 stocks and sector ETFs are available through a subscription add-on which delivers periodic updates since stock levels tend to change with greater frequency. 34-page VooDoo Lines Manuel: Purchase Link: