SBV Technical Analysis - Trading Volume with Confidence
Trailing Strategy to close a trade
An Example of an S&P 500 Trading System using a technical analysis based on the SBV Oscillator
June 13, 2008
+8% (108 points) in two months
This week's SBV technical analysis example is a continuation of a previous example on May 30, 2008. In this week's example, we use 33% signal line.
Chart 1. Relationship between the SBV oscillator and index reversal points. S&P 500 index. 60-day view. 1 bar = 1 hour. SBV(20)
In the previous 60-day SBV example, we have explained the using of the trailing stop rule based on the SBV indicator:
Trailing Stop Rule Example #1: If the SBV had advanced above 20% and has started to decline without crossing the 33% line, we close the long position and open a short position if the SBV declines below 20%
Trailing Stop Rule Example #2: Once the SBV has declined for more than 10% and we are long, we close the long position and stay in cash until a new signal appears.
This week's SBV example shows the use of this rule on June 2, 2008.
We have always stated that the trading system that we describe in our examples is very simple and that there is always room to improve it. If you follow our examples, you may see that even such a simple and straightforward system delivers profit. In reviewing the history of our examples, you may find description of different rules that can be incorporated in the system in order to make it more conservative, to cause it to generate more signals, or to make it react more quickly to strong signals, etc.
In this week's example, we would like to introduce another rule that can be used in our system. We have already mentioned the use of the "trailing stop." The same principle can be used to generate signals. In our examples, Rules #2 and #4 are used to generate "Long" and "Short" signals based on the fixed signal line (33% in our present example). However, this rule can be modified to use a trailing signal line:
Rule #2 Example: Once the SBV indicator has started to advance after having been below minus 30%, we will enter a long position when SBV advances by 10% from its most recent lowest negative level. If SBV had declined below minus 20% and has started to advance without crossing minus 30%, we will enter a long position when SBV advances above minus 20%.
For example, according to the rule above:
- If the SBV has dropped to minus 75% and starts to advance, we will enter a long position when SBV advances above minus 65%;
- If the SBV has dropped to minus 40% and starts to advance, we will enter a long position when SBV advances above minus 30%;
- If the SBV has dropped to minus 25% and starts to advance, we will enter a long position when SBV advances above minus 20%.
As you may see, Rule #2 above uses a trailing principle to generate a "Long" signal. A similar rule could be created instead of Rule #4 to generate a "Short" signal.
Note, all numbers (10% trailing, 33% signal and 20% signal) in our examples are subjective and should be tested before use.
In our trading example, we applied the following simple system which is based on our SBV indicator:
- Once the SBV indicator has declined below minus 33% (the indicator will now show red), we will enter a short position (if we are not already short).
- Once the SBV indicator has advanced above minus 33% (after having been below that level), we will enter a long position (the indicator still shows red).
- Once the SBV indicator has rallied above plus 33% (the indicator will now show green), we will enter a long position (if we are not already long).
- Once the SBV indicator has declined below plus 33% (after having been above that level), we will enter a short position (the indicator still shows green).
- Additional Stop Loss Rule - If the SBV had fallen into negative territory and has begun to rise, but has not hit the signal line, close the short position when the SBV is back in positive territory, and stay in cash until a new buy signal appears. Do the opposite for a long position.
- Additional Trailing Stop Rule - If you are in long position and the SBV has declined by more than 10%, close the long position and stay in cash until a new signal appears. If you have a short position and the SBV has advanced by more than 10%, close the short position and stay in cash until a new signal appears.
Table 1: Trades based on the 5-rule (additional stop-loss rule) system.
|Open Trades||Closed Trades||Profit|
|04/15/08||rule #2||Buy||1334||04/21/08||rule #4||Sell||1384||+50|
|04/21/08||rule #4||Sell Short||1384||04/24/08||rule #5||Cash||1389||-5|
|05/12/08||rule #2||Buy||1397||05/14/08||rule #4||Sell||1410||+13|
|05/14/08||rule #4||Sell Short||1410||05/27/08||rule #2||Buy to Cover||1379||+31|
|05/27/08||rule #2||Buy||1379||06/02/08||rule #6||Cash||1388||+9|
Note: The 20% level for the SBV indicator was determined in relation to the prevailing market conditions at the time that the trading examples were selected. In order to establish the optimal critical levels for the SBV indicator, traders should consider the current market situation and review the history of prior volume surges, including their magnitude (i.e., the level that the SBV indicator reached).
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