SBV Technical Analysis - Trading Volume with Confidence
S&P 500: How to adapt the system to a trend
An Example of a Trading System using a technical analysis based on the SBV Oscillator
July 18, 2008
This week's SBV example is a continuation of the example of June 27, 2008. This example continues to illustrate this rule in practice:
Chart 1. Relationship between the SBV oscillator and index reversal points. S&P 500 index. 60-day view. 1 bar = 1 hour. SBV(20).
Signal Level 1: If the SBV rises above plus 20% or falls below minus 20% and reverses its trend without hitting 33%, use 20% as the signal line.
Signal Level 2: If the SBV ruses above plus 33% or falls below minus 33%, use 33% as the signal line.
- Once the SBV indicator declines below a negative signal level (the indicator will now show red), we will enter a short position (if we are not already short);
- Once the SBV indicator advances above a negative signal level (after having been below that level), we will enter a long position (the indicator still shows red);
- Once the SBV indicator rallies above a positive signal level (the indicator will now show green), we will enter a long position (if we are not already long);
- Once the SBV indicator declines below a positive signal level (after having been above that level), we will enter a short position (the indicator still shows green);
- Stop-loss rule: If you are short and the SBV dropped into negative territory and then began to rise without reaching the signal line, close the short position when the SBV is back in positive territory. Do the opposite for a long position.
Table 2: Trades based on the 5-rule (additional stop-loss rule) system.
|Open Trades||Closed Trades||Profit|
|05/20/08||rule #4||Sell Short||1416||05/27/08||rule #2||Buy to Cover||1379||+37|
|05/27/08||rule #2||Buy||1379||06/02/08||rule #4||Sell||1388||+9|
|06/02/08||rule #4||Sell Short||1388||06/05/08||rule #2||Buy to Cover||1391||-3|
|06/05/08||rule #2||Buy||1391||06/06/08||rule #5||Cash||1385||-6|
|06/12/08||rule #2||Buy||1350||06/17/08||rule #5||Cash||1356||+6|
|06/17/08||rule #4||Sell Short||1356||06/23/08||rule #2||Buy to Cover||1317||+39|
|06/23/08||rule #2||Buy||1317||06/24/08||rule #4||Sell||1310||-7|
|06/24/08||rule #4||Sell Short||1310||06/24/08||rule #2||Buy to Cover||1305||-5|
|06/24/08||rule #2||Buy||1305||06/26/08||rule #5||Cash||1295||-10|
|07/01/08||rule #2||Buy||1279||07/02/08||rule #5||Cash||1272||-7|
|07/07/08||rule #2||Buy||1270||07/08/08||rule #1||Sell||1250||-20|
|07/08/08||rule #1||Sell Short||1250||07/08/08||rule #2||Buy to Cover||1270||-20|
|07/08/08||rule #2||Buy||1270||07/09/08||rule #5||Cash||1250||-20|
Examples of System Adaptations to a trend
During the last two months our simple system has generated nine negative and only five positive signals. However, Rule #5 has protected the system from bigger losses and the system has still managed to generate a positive summary return for this period.
As we mentioned several time in our previous chart examples, this system is very simple. There is always room to improve the system and adjust it to one's personal trading style and risk tolerance. For instance, knowledge of the general market trend may help to avoid fake signals. If the analysis of the higher timeframe or other technical indicators suggests that the longer term-trend is downward, then the system could be modified accordingly.
As an example, a conservative trader may say:
- Ignore signals to go "Long" and trade only "Short" signals - do not play against the trend.
A more conservative trader may say:
- When Rule #5 prompts you to go to "Cash" from a "Short" position, stay in cash until a new buy signal appears.
- When Rule #5 prompts you to go to "Cash" from a "Long" position, open a "Short" trade.
Another trader may select different signal lines to generate "Long" and "Short" signals:
- Use a plus 1% signal line to generate "Short" Signal in Rules #1 and #4;
- Use a minus 33% signal line to generate "Long" Signal in Rules #2 and #3;
The system changes above are for a bear market. However, the opposite system modification could apply during a Bull market.
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