S&P 500 Simple Trading System

+15% in 2 months

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

This week's example has interesting situation when SBV did not reach 33% trigger level, yet, started to decline. From one side, the system did not generated a signal to close the position that was opened on May 27, 2008. From the other side, the SBV started to decline by increasing the odds of possible move down and if the market drops the waiting when the rule #5 (see the system below) is triggered may lead the currently winning position into a lost trade.

Please, keep in mind that we always stated that this system is simple, yet, it's recommended to adjust this system to the personal trading style and risk tolerance by embedding into the system additional rules. Yes, we show only 4-5 rules (even with such small number of rules the system generates positive returns), however it does not imply that there is no room for the system improvement.

In the current situation the system is in the +1.4% profitable long position with possibility of the turn down without hitting the 33% signal line. It would be logical in such situation to protect the profit by embedding into the system an additional rule. Many traders use trailing stop to protect a profit and this strategy could be used in our system as well. In the current example a system user may say:

Trailing Stop Rule Example #1: If the SBV advanced above 20% and started to decline without crossing 33% we close the long position and open short position if the SBV declines below 20%

or

Trailing Stop Rule Example #2: Once SBV declined for more then 10% and we are in long, we close a long position and and stay in cash until a new signal is generated.

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

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 33% (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 33% (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 33% (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 33% (after having been above that level), we will enter a short position (the indicator still shows red);
5. Additional Stop Loss Rule - 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.
6. Additional Trailing Stop Rule - If we are in long position and SBV declined for more then 10%, we close a long position and and stay in cash until a new signal is generated. If we are in short position and SBV advanced for more then 10%, we close a short position and and stay in cash until a new signal is generated.

Table 1: Trades based on the   5-rule (additional stop-loss rule) system.

Note: The 33% 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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