S&P 500 Example of a Trading System using the technical analysis based on the SBV Oscillator

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May 30, 2008

+15% in two months

This week's SBV chart example is a continuation of the example of May 23, 2008. In this week's technical analysis example, we use a 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).



This week's example is interesting as the SBV did not reach the 33% trigger level, but started to decline. On one hand, the system did not generate a signal to close the position that was opened on May 27, 2008. On the other hand, when the SBV started to decline, the odds of a possible downward move rose. If the market ends its waiting period when rule #5 (see the system below) is triggered, it may cause the current winning position to become a lost trade.

Please, keep in mind that, although we have always said that this system is simple, we recommend that you adapt this system to your personal trading style and risk tolerance by including additional rules in the system. Yes, we show only 4-5 rules. Even with such a small number of rules, the system generates positive returns. However, this does not imply that the system has no room for improvement.

In the current situation, the system is in a +1.4% profitable long position with a possibility of a turn down without hitting the 33% signal line. It would be logical in such a situation to protect the profit by incorporating an additional rule in the system. Many traders use trailing stops to protect profits. This strategy could also be used in our system:

Trailing Stop Rule Example #1: If the SBV has advanced beyond the 20% line and begun to decline without having crossed the 33% line, we close the long position and open a short position if the SBV declines below the 20% line

or

Trailing Stop Rule Example #2: Once SBV has declined by more than 10% and we are long, we close the long position and stay in cash until a new signal appears.

The 1st rule is more specific, whereas rule #2 is more general. Yet, the second rule could be used instead of, or as addition to, Rule #5 (the stop-loss rule) in the system we describe below.

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

1. 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).
2.  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).
3.  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).
4.  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).
5.  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.
6.  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.

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).

Our charts are unique in that they give traders the opportunity to choose the specific chart settings that best fit their personal trading styles and risk tolerances. Traders can thus develop and test their own trading systems. On our charts, you can scroll back in history to test any system that you have created.

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