Sell buy trading system

Additional Stop-Loss Rule

In our trading example, we applied the following simple trading system based on our SBV indicator:

Once the SBV indicator declines below minus 20% (the indicator will now show green), we enter a short position (if we are not already short);
Once the SBV indicator advances above minus 20% (after having been below that level), we enter a long position (the indicator still shows green);
Once the SBV indicator rallies above plus 20% (the indicator will now show red), we enter a long position (if we are not already long);
Once the SBV indicator declines below plus 20% (after having been above that level), we enter a short position (the indicator still shows red).

Basically, rules #1 and #3 in the system above are set to cut losses and open an opposite trade if the price does not move as predicted by the signal direction. This unique feature of the system allows it to correct itself and cut losses before it's not too late. At the same time the system above does not assume a trader stays in "cash" - as soon as one position is closed the opposite trade is opened.

Please keep in mind that the trading system represented in our examples is very simple and uncomplicated. Even though this system is considered profitable, it is recommended that investors and traders adjust the system to their own personal trading style and risk tolerance. Many traders would prefer, and it's recommended, to have additional stop-loss trading strategies, or other rules that would protect the system, and many traders also prefer to stay in cash in uncertain situation. Some traders may, for example, add rules that would use percent stop-loss or other rules that simulate stop-loss and amend the system.

For instance, losses can be reduced by adding a simple additional stop-loss rule to the system:

Rule # 5 (in addition to 4 rules above): If the SBV drops into negative territory and then starts to rise without hitting the signal line, close the short position when the SBV is back in positive territory, and stay in cash until a new buy signal is generated. Vise versa for a long position.

Basically this rule tells us that if the price moves against a previously generated signal it is not necessary to wait when rule #1 or rule #3 is triggered to cut losses - the trade could be closed earlier and a trader may stay in cash until a new signal is generated. This way the losses can be cut much earlier and should be much smaller, and some losses might even turn into a profit. Of course there could be situations when after a trade is closed the trend may reverse again and move in the closed trade direction. Then a trader might consider that he/she lost a profitable trade, however in many situations smaller losses will cover this unearned profit.

Below we have compiled two examples of a simple trading system. In the first example the 4-rule trading system is used while in the second example a rule #5 (additional stop-loss rule) is added. This rule makes the system more complex, however, it allows cutting losses earlier and staying in cash in an uncertain situation until a new signal is generated.

Example #1:

Chart 1. Relationship between the SBV oscillator and index reversal points. NASDAQ 100 index. 15-day view. 1 bar = 15 min. SBV(16)

Table 1: Trades based on the 4-rule system.

Open Trades Closed Trades Profit
(points)

Time Motivation Trade Index Time Motivation Trade Index

10/02/07 rule #4 Sell Short 2114 10/02/07 rule #2 Buy to Cover 2106 +8

10/02/07 rule #2 Buy 2106 10/03/07 rule #1 Sell 2100 -6

10/03/07 rule #1 Sell Short 2100 10/04/07 rule #2 Buy to Cover 2103 -3

10/04/07 rule #2 Buy 2103 10/08/07 rule #4 Sell 2150 +47

10/08/07 rule #4 Sell Short 2150 10/08/07 rule #3 Buy to Cover 2156 -9

10/08/07 rule #3 Buy 2156 10/09/07 rule #4 Sell 2162 +6

10/09/07 rule #4 Sell Short 2162 10/10/07 rule #3 Buy to Cover 2170 -8

10/10/07 rule #3 Buy 2170 10/10/07 rule #4 Sell 2169 -1

10/10/07 rule #4 Sell Short 2169 10/11/07 rule #3 Buy to Cover 2185 -16

10/11/07 rule #3 Buy 2185 10/11/07 rule #4 Sell 2187 +2

10/11/07 rule #4 Sell Short 2187 10/12/07 rule #2 Buy to Cover 2168 +19

10/12/07 rule #3 Buy 2168 10/11/07 rule #4 Sell 2172 +4

Total:
+43

Example #2:
(The same as Example #1 + additional rule)

Rule # 5 (in addition to 4 rules above): If the SBV dropped into negative territory and started to rise without hitting the signal line, close the short position when the SBV is back in the positive territory, and stay in cash until a new buy signal is generated. Vise versa for a long position.

Chart 2. Relationship between the SBV oscillator and index reversal points. NASDAQ 100 index. 15-day view. 1 bar = 15 min. SBV(16)

Table 1: Trades based on the 5-rule system.

Open Trades Closed Trades Profit (points)

Time Motivation Trade Index Time Motivation Trade Index Example #2 Example #1

10/02/07 rule #4 Sell Short 2114 10/02/07 rule #2 Buy to Cover 2106 +8 +8

10/02/07 rule #2 Buy 2106 10/03/07 rule #5 Sell
(exit to cash) 2113 +7 -6

10/03/07 rule #1 Sell Short 2100 10/04/07 rule #2 Buy to Cover 2103 -3 -3

10/04/07 rule #2 Buy 2103 10/08/07 rule #4 Sell 2150 +47 +47

10/08/07 rule #4 Sell Short 2150 10/08/07 rule #5 Buy to Cover
(exit to cash) 2150 0 -9

10/08/07 rule #3 Buy 2156 10/09/07 rule #4 Sell 2162 +6 +6

10/09/07 rule #4 Sell Short 2162 10/10/07 rule #5 Buy to Cover
(exit to cash) 2168 -6 -8

10/10/07 rule #3 Buy 2170 10/10/07 rule #4 Sell 2169 -1 -1

10/10/07 rule #4 Sell Short 2169 10/11/07 rule #5 Buy to Cover
(exit to cash) 2172 -3 -16

10/11/07 rule #3 Buy 2185 10/11/07 rule #4 Sell 2187 +2 +2

10/11/07 rule #4 Sell Short 2187 10/12/07 rule #2 Buy to Cover 2168 +19 +19

10/12/07 rule #3 Buy 2168 10/11/07 rule #4 Sell 2172 +4 +4

Total:
+80 +43

Adding a small rule to the system may substantially reduce losses, and in some cases that rule might even double the summary profit.