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 red), 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 red);
3. Once the SBV indicator rallies above plus 33% (the indicator will now show green), 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 green);
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.

Open Trades				Closed Trades				Profit (points)
Time	Motivation	Trade	Index	Time	Motivation	Trade	Index
04/15/08	rule #2	Buy	1334	04/21/08	rule #4	Sell	1384	+50
04/21/08	rule #4	Sell Short	1384	04/24/08	rule #5	Cash	1389	-5
05/12/08	rule #2	Buy	1397	05/14/08	rule #4	Sell	1410	+13
05/14/08	rule #4	Sell Short	1410	05/27/08	rule #2	Buy to Cover	1379	+31
05/27/08	rule #2	Buy	1379	06/02/08	rule #6	Cash	1388	+9
06/12/08	rule #2	Buy	1350	06/17/08	rule #6	Cash	1356	+6
Total:								+104

In the last week's example we have explained the using of the trailing signal that would help to avoid a situation when the SBV oscillator moves close to the signal line, yet does not hit it to generate signal.

This example illustrates this rule on the practice when on June 16, 2008 SBV oscillator did not hit a 33% signal line and started to decline.

Trailing Signal Line Example:

To generate "Long" signal - Once SBV indicator started to advance after have been below minus 30%, we will enter a long position when SBV advances for 10% from its most recent lowest negative level. If SBV declined below minus 20% and started to advance without crossing minus 30% we will enter a long position when SBV advances above minus 20%.

To generate "Short" signal - Once SBV indicator started to decline after have been above plus 30%, we will enter a short position when SBV declines for 10% from its most recent highest positive level. If SBV advanced above plus 20% and started to decline without crossing plus 30% we will enter a short position when SBV declines below minus 20%.

The simplified version of the rules above could be a strategy of using multiple fixed signals levels:

Signal Level 1: If the SBV runs above plus 20% or drops below minus 20% and reverses its trend without hitting 33% then use 20% as signal line;

Signal Level 2: If the SBV runs above plus 33% or drops below minus 33%, then use 33% as signal line.

In similar way signal levels could be build further.

It completely depends on a trading style and risk tolerance of a trader on how to modify a trading system. For instance, one trader may select a conservative trading system (with fixed 33% signal level) which now would be in "Cash" position. On the other hand, another trader may prefer using a riskier system (with multiple fixed signal levels) which now would be in in profitable "Short" position. While the conservative system may miss some of the trends the riskier system would catch all of the trends yet would generate more negative trades.

Signal Level 1: If the SBV runs above plus 20% or drops below minus 20% and reverses its trend without hitting 33% then use 20% as signal line;

Signal Level 2: If the SBV runs above plus 33% or drops below minus 33%, then use 33% as signal line.

Table 2: 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
04/15/08	rule #2	Buy	1334	04/21/08	rule #4	Sell	1384	+50
04/21/08	rule #4	Sell Short	1384	04/24/08	rule #5	Cash	1389	-5
04/29/08	rule #4	Sell Short	1390	04/30/08	rule #5	Cash	1397	-7
05/05/08	rule #4	Sell Short	1406	05/05/08	rule #3	Buy to Cover	1408	-2
05/05/08	rule #3	Buy	1408	05/06/08	rule #4	Sell	1402	-6
05/06/08	rule #4	Sell Short	1402	05/12/08	rule #2	Buy to Cover	1397	+5
05/12/08	rule #2	Buy	1397	05/14/08	rule #4	Sell	1410	+13
05/14/08	rule #4	Sell Short	1410	05/15/08	rule #3	Buy to Cover	1421	-11
05/15/08	rule #3	Buy	1421	05/20/08	rule #4	Sell	1416	-5
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 #4	Cash	1356	+6
06/17/08	rule #4	Sell Short	1356	06/20/08			1318	+38
Total:								+113

As you may see, there is no significant difference in returns between the system #1 and system #2. Yet, we believe that using additional technical indicators may help to eliminate negative trades and substantially improve the system #2.