Top Hat Indicator
What is it?
Reversion to the mean is one of the quintessential parts of trading.
What does that mean?
What goes way up must come down, and what goes way down must come up.
That was the concept that inspired the Top Hat Indicator. Top Hat is designed to show a signal on the charts when a stock has gotten too hot or too cold and the probability of “mean reversion” or, more simply, a move in the opposite direction is most likely.
All financial instruments have a personality to them that can, in a way, be measured by average true range.
For example, a stock like Pfizer will move significantly less day-to-day than a comparably priced one like Intel.
Understanding the personality of a stock and the concept of mean reversion drives the Top Hat indicator.
We like to use this indicator as an early indicator of a swing up or down pushing the limits of the typical move which usually precedes a reversal in the opposite direction.
The ST Top Hat indicator is designed to alert you when a possible trend reversal or at least a trend change is immanent.
This heads up warning allows you to hedge your current trades to maintain optimal positioning in the market.
This article will walk you through a few examples of the indicator in action where you will be able to clearly define the set up and understand how to make use of this indicator.
How we use it?
We use the Top Hat indicator to understand when a stock is getting statistically overheated or overly sold.
Top Hat works on the premise of Average True Range, but the underlying calculation of the indicator is much more nuanced. Behind the scenes Top Hat is scanning the ATRs of three different time frames to minimize noise and maximize the effect of the signals it provides.
By automatically scanning these three time frames all at once and only showing a signal when all three are aligned the Top Hat indicator is an early warning that the trend may be reversing after reaching statistically significant turning points
Indicator shows where "Tops" appear to be forming in the current underlying.
TSLA - Tesla
AAPL - Apple
XLI - Spider Trust
QQQ - Powershare QQQ
NQ - E mini Nasdaq
Indicator shows where "Bottoms" appear to be forming in the current underlying.
AZO - Autozone Inc.
/CL - Light Sweet Crude
Settings - Top Hat
Top Hat Scan in Thinkorswim (TOS)
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