Introducing…drum roll TOGGLE latest leading indicator known as the Rangefinder Index. Like the name describes, this indicator can be used to help investors trade the S&P 500 within a range.
What do traders mean when they speak about the “range”?
When traders speak about the range, they generally refer to the recent range that the security has explored in the recent past.
In the chart above, the S&P 500 has been swinging between 3,750 and 4,600, so with reference to the last year traders would refer to that interval as the range of the S&P 500.
What does it mean “revert to the mean”?
Borrowing from statistics, traders talk about “reverting to the mean” when a security is at one extreme of a recent range - “reverting to the mean” is the hypothesis that the security will stop falling (or rising) and will trend back towards the centre of the recent interval.
The Rangefinder seeks to help in identifying the moments when such a reversion is about to occur.
How do you calculate the Rangefinder?
The Rangefinder Index is calculated by comparing the midpoint of the high-low bars with the midpoint of the open-close bar.
The intuition behind this is that, as markets begin to invert a trend, the peaks and lows of the day tend to move in the future direction earlier on.
How do I use the Rangefinder?
We tested the Rangefinder on the basis of a crossover rule: when the indicator crosses above -0.75 the reversion is upwards, and vice-versa when the indicator crosses below 0.75 the correction is downwards.
Does it work?
The simple answer is yes. The indicator has already proven useful for trading the S&P 500 over the last few months. You can see in the chart above the correct and incorrect cases in the recent past.
However, this tool is best used as a compliment to your strategy rather than the sole indicator. For example, a TOGGLER can use the Rangefinder with the TLI, as well as individual insights and observing macro news. We always recommend users supplement TOGGLE insights with more research in order to make confident and informed decisions.
Learn more about candlesticks here.