March 28, 2008

This week SBV chart example is a continuation of previous example on March 7, 2008. In this week's example we use the same settings that were already used by showing the consistency of our trading system over the long period of time.

This week 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)

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 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.

Second time over the last 3 months the rule #6 was used. First time it was used when - in our Market outlook on January 23,2008 we have mentioned:

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

Rule #6: If you see the SBV below minus 20% or above plus 20% for more then 8-10 session in a row then lower the signal line from minus 20 to minus 40-60% or raise 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
02/28/08	rule #4	Sell Short	1372	03/05/08	rule #2	Buy to Cover	1327	+45
03/05/08	rule #2	Buy	1327	03/06/08	rule #1	Sell	1314	-13
03/06/08	rule #1	Sell Short	1314	03/11/08	rule #6	Buy to Cover	1290	+24
03/11/08	rule #6	Buy	1290	03/13/08	rule #4	Sell	1290	0
03/13/08	rule #4	Sell Short	1290	03/13/08	rule #3	Buy to Cover	1315	-25
03/13/08	rule #3	Buy	1315	03/14/08	rule #4	Sell	1291	-24
03/14/08	rule #4	Sell Short	1291	03/18/08	rule #2	Buy to Cover	1310	-19
03/18/08	rule #2	Buy	1310	03/19/08	rule #4	Sell	1308	-2
03/19/08	rule #4	Sell Short	1308	03/20/08	rule #3	Buy to Cover	1310	-2
03/20/08	rule #3	Buy	1310	03/24/08	rule #4	Sell	1350	+40
03/24/08	rule #4	Sell Short	1350	03/25/08	rule #3	Buy to Cover	1355	-5
03/25/08	rule #3	Buy	1355	03/26/08	rule #4	Sell	1340	-15
03/26/08	rule #4	Sell Short	1340	03/28/08			1315	+25
Total:								+29

+2% on the S&P 500 in March
worst month in our 2-year history
of monitoring 60-day SBV

As we mentioned above, even the 60-day SBV (20) shows positive summary number over the last month, we consider this month the worst month in our history of tracking this chart setting. Taking a look back and analyzing the past months we thought it would be logical to put some Q&A which would help to improve the system:

Question #1. Why the system had several negative trades in a row?

Answer: When the system generated a buy or sell signal it was too late to open a position. Then the market changed the trend very dynamically and when the system generated a signal to close a position it was too late to do it.

Question #2: What would help to reduce the losses and open a position earlier?

Answer: If the signal line has been moved to 30-40% level, then the buy or sell signals would be generated earlier and some of the trades would result in smaller losses or even become winners.

On 60-day chart 1 bar = 1 hour, if a trader evaluates SBV value 5-10 minutes before the bar completion (on 50-55 min of the bar) then he/she may assume the final bar value and make a trading decision 5-10 min earlier. In the volatile market 5-10 minutes earlier opened/closed position may give advantage of faster reaction on trend changes.

Question #3: How to define periods when signal line could be changed or when a trader may try to evaluate SBV before a bar completion?

Answer: The current market is extremely volatile and may change the direction very sharply with strong crash down or dynamic rally up. The VIX (volatility index) may help identify these periods on the market and a trader may try to adjust the SBV signal levels when VIX is reaching high levels (high VIX indicates high level of the uncertainty on the market and as a result high volatility).

The last couple of months are showing that for the periods when VIX is above 27 the 30-40% SBV signal line works better for our SBV system and when the VIX is above 30 the 50-60% signal line could be used.

This is just an example of how the SBV signal line could be dynamically changed in respect to the changes in the market behavior. With this example we are trying show what we think could be used as additional tools that may improve not just our but other trading systems.

Note: The 20% level for the SBV indicator was determined in relation to the prevailing market conditions at the time 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 a chart history of prior volume surges including their magnitude (i.e., the level the SBV indicator reached).

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

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