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New Trading Strategies for ThinkOrSwim Published

thinkorswim trading strategies

New ThinkOrSwim Trading Strategies Published

I’ve recently posted several strategy scripts to the website that identify quantifiable edges for my fellow traders. These ThinkOrSwim trading strategies can be traded standalone, or tweaked further and customized to fit an individual’s trading style. They can either be used to setup automated trading systems in other platforms, or traded manually within ThinkOrSwim and improved with price action trading principles. My most recent strategies are all listed under the strategies category on the site, and here’s a quick reference list:

Most of these strategies come straight out of Larry Connors and Cesar Alvarez’s book “Short Term Trading Strategies that Work,” and are specifically for trading the SPY, SPX, or ES futures. But these ThinkOrSwim trading strategies may also provide edges on other instruments, and you can test them on whatever symbols you like to trade, to see if they can be applied profitably there as well.

I hope these strategies are as intriguing to you as they were to me, and hopefully they will provide you a more quantifiable way to determine your edge in the market as well.

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Trade Expectancy Formula: How to Make Consistent Profits

trade expectancy formula example

The trade expectancy formula is a super important concept for you to grasp before dumping too much money into the trading world. In any kind of trading there are essentially two forces at work: probability, and risk/reward, and people often misuse the terms. I’ve seen people refer to a their strategy as being “high probability” while their actual win rate is really low. So let’s clear this up once and for all:

Probability = how likely it is that your trade will be correct (Example: 50% as in a coin toss)

Risk/Reward = what you risk on the trade divided by what you stand to gain on the trade (Example: risk $1 to make $2 = R/R of 1/2)

Together, these two forces form the “trader’s equation” which is the trade expectancy formula:

(Potential Reward x Win Probability) – (Potential Loss x Loss Probability)

This formula can be used to analyze both individual trades you’re considering taking, and the performance of trading systems in general. The trading system version looks like this:

(Average Win x Win Rate) – (Average Loss x Loss Rate)

In either case, if this number is positive, it’s good. If not, it’s bad.

So in order to take objectively rational trades, you need to make sure every trade you take makes sense in terms of this formula. And you need to occasionally review the ongoing performance of your system by making sure your expectancy remains positive as new trades are added to your trading journal.

In most trading situations you will find the probability of the stock going in your direction hovers around 50%. Author and price action trader Al Brooks says that you should never expect the probability to be any more than 60% or less than 40%, otherwise nobody will be willing to take the other side of the trade. So you should assume the probabilities don’t vary a whole lot in most circumstances.

So what you should actually focus on is looking for asymmetric risk/reward situations. In other words, make sure that you stay out of trades that have a bad risk/reward ratio, and only consider placing trades that have an attractive risk:reward ratio to their potential target.

For instance, if you always look for pullback trades that have at least a 1:2 risk-reward ratio to the prior high, and assume a 50% probability of success, then your trade expectancy formula will look like this:

(2 x 50%) – (1 x 50%)

= 1 – 0.5

= 0.5 expectancy

If you assume a 60% probability, and a 1:2 risk/reward:

(2 x 60%) – (1 x 40%)

= 1.2 – 0.4

= 0.8 expectancy

So higher probability definitely helps. However, if you keep the probability the same as in the first example, and just increase your reward/risk ratio to 3:

(3 x 50%) – (1 x 50%)

= 1.5 – 0.5

= 1.0 expectancy

So risk/reward plays a big role. Also note what the trade expectancy formula looks like for losing system at 40% and 1:1 risk/reward:

(1 x 40%) – (1 x 60%)

= 0.4 – 0.6

= -$0.2 expectancy

The higher the probability of trades you take, the better. But the primary thing you have control over is lowering your risk/reward (or increasing your reward/risk). This can take several forms, but most practically speaking it probably means cutting your losses and letting your winners run!

In dollar terms that you would probably be trading, here’s what it would look like risking $500 on each trade with the aim of making $1000 in profit at a 50% probability of success:

($1000 x 50%) – ($500 x 50%)

= $500 – $250

= $250 expectancy

So in closing, here is a quick reference graph showing which kinds of systems can work and which can’t work based on the trade expectancy formula:

trade expectancy formula
trade expectancy formula – profitable vs. unprofitable trading systems and setups
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Updates to Percent Change from Open

Percent Change From Open indicator

I’ve just released some updates to the % change from open indicator/column/scan package here: https://easycators.com/thinkscript/percent-change-from-open/

Now it includes several other bonus scripts that weren’t there before:

  1. All new indicator showing percent change, dollar change, and ATR-multiple change from open (or any other starting price)
  2. Max % gained column
  3. Max % lost column
  4. Max % Gained or Lost column (based on closing direction)
  5. Column showing % of today’s bar closes that were above a chosen moving average (to sort a watchlist by relative intraday trend strength)

This is what the new indicator looks like:

Percent Change From Open indicator
Percent Change From Open indicator

 

Changes take effect immediately, and as always, prior purchasers get all updates for free in their My Account > Orders > View Order Details screen.

Love you guys, thanks!

-Josiah

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Updates to Relative Volume + Position Sizer

Today I’ve released some substantial updates to both the Relative Volume indicator set and the Position Sizer.

Relative Volume, Trades, Shares-Per-Trade, and Shares-Per-Range

  • The Relative Volume, Trades, Shares-Per-Trade, and Shares-Per-Range indicators have all been combined into a single indicator that lets you switch between modes.
  • The Time-Based Average and the Moving Average based relative volume indicators have now all been combined into the single indicator as well, so you can switch between a time based average for use on intraday timeframe charts, and a custom moving average of volume for any timeframe chart.
  • Efficiency improvements have also been made to reduce resource consumption and keep your platform responsive.
  • Find out more here.
Thinkorswim Time Based Relative Volume Settings 1
Thinkorswim Time Based Relative Volume Settings 1

 

Thinkorswim Time Based Relative Volume Settings 2
Thinkorswim Time Based Relative Volume Settings 2

 

Thinkorswim Time Based Relative Volume
Thinkorswim Time Based Relative Volume

 

Position Sizer

Thinkorswim Position Sizer updated labels

  • The Position Sizer has a new mode for Fixed Dollar Target, in addition to the existing Fixed Price and Risk Multiple target modes.
  • New mode for stop – fixed dollar stop
  • New mode for risk per trade – choose a fixed dollar amount to risk or keep the normal percentage of buying power, either auto or manually chosen
  • All the data points in the label have been separated out so they can be controlled individually.
  • New labels for Bid-Ask Spread, Daily Volume, stop size, buying power required, etc.
  • Add spread size to stop size automatically
  • Fixed an issue to limit number of shares not only by risk per trade but also by buying power
  • Added offset setting for labels, so you can choose to display the entry/stop/target and position sizing info for the prior candle instead of the current candle, in case you like to use bar break types of entries based on the just-closed prior candle.
  • Find out more here.
Thinkorswim Position Sizer - Settings 1
Thinkorswim Position Sizer – Settings 1

 

Thinkorswim Position Sizer - Settings 2
Thinkorswim Position Sizer – Settings 2

 

Thinkorswim Position Sizer - Settings 3
Thinkorswim Position Sizer – Settings 3

 

Thinkorswim Position Sizer - Settings 4
Thinkorswim Position Sizer – Settings 4

 

Thinkorswim Position Sizer - Settings 5
Thinkorswim Position Sizer – Settings 5

 

I will be updating the images and data sheets for each in the coming days, but I wanted to get the release notes out there for people who’ve already purchased in the past.

I hope these changes will add value and benefit your trading workflow. As always, updates are free to prior purchasers and the new links are available in the My Account > Orders area of the site. Thanks for your continued support and kind feedback!

-Josiah