S&P 500:
An Example of a Trading System using the SBV Oscillator

January 25, 2008

 20% on the S&P 500 in two months

This week's SBV chart example is a continuation of the previous example of January 18, 2008. In this week's example, we use the same settings that were previously used by showing the consistency of our trading system over a long period of time.

This week's SBV chart example is based on the 60-day SBV(20) S&P 500 chart.

Chart 1. Relationship between the SBV oscillator and index reversal points. S&P 500 index. 60-day view. 1 bar = 1 hour. SBV(20)
SP 500 Chart

It's Simple and profitable

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

  1. 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);
  2. Once the SBV indicator advances above minus 20% (after having been below that level), we will enter a long position (the indicator still shows green);
  3. 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);
  4. Once the SBV indicator declines below plus 20% (after having been above that level), we will enter a short position (the indicator still shows red);
  5. If the SBV has fallen into negative territory and begun to rise without reaching 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.

In our Market outlook of January 23, 2008, we wrote:

"A note for those who use the 60-day SBV(20) simple trading system: we recommend that you lower the negative level from minus 20% to minus 50-60% after such a prolonged Selling volume accumulation. An additional rule that may increase the efficiency of the system should include the following: 'If you the SBV remains below minus 20% for more then 8-10 session in a row, lower the signal line from minus 20 to minus 50-60%."

This is one way to improve the system. When the market has moved in one direction for a prolonged period of time and the Selling or Buying volume accumulation grows significantly (to a large red or green SBV area) it is reasonable to expect a sharper and a stronger reversal than usual. In this case, it could be a little late to close a position when the SBV has crossed the 20% level. For such a situation, an additional rule could be included:

Rule #6: If the SBV remains below minus 20% or above plus 20% for more then 8-10 session in a row, lower the signal line from minus 20 to minus 40-60% or raise it from plus 20% to plus 40-60%, respectively.

Table 1: Trades based on the 5-rule (additional stop-loss rule) system.
Open Trades Closed Trades Profit
(points)
Time Motivation Trade Index Time Motivation Trade Index
11/14/07 rule #4 Sell Short 1485 11/27/07 rule #2 Buy to Cover 1415 +70
11/27/07 rule #2 Buy 1415 12/03/07 rule #4 Sell 1473 +58
12/03/07 rule #4 Sell Short 1473 12/06/07 rule #5 Buy to Cover 1482 -9
12/06/07 rule #3 Buy 1495 12/11/07 rule #4 Sell 1487 -8
12/11/07 rule #4 Sell Short 1487 12/20/07 rule #2 Buy to Cover 1453 +34
12/20/07 rule #2 Buy 1453 12/27/07 rule #4 Sell 1483 +30
12/27/07 rule #4 Sell Short 1483 01/10/08 rule #2 Buy to Cover 1400 +83
01/10/08 rule #2 Buy 1400 01/11/08 rule #5 Sell 1406 +6
01/15/08 rule #4 Sell Short 1391 01/24/08 rule #6 Buy to Cover 1341 +50
01/24/08 rule #6 Buy 1341 01/25/08 rule #5 Sell 1332 -9

Total:  

+330

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.

Disclaimer: The chart example is intended for educational purposes only and does not constitute trading advice or make or imply any market trend prediction.

More Examples: