S&P 500 chart Example of a Trading System using a technical analysis based on the SBV Oscillator

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May 23, 2008

+16% in two months

This week's SBV technical analysis example is a continuation of the example of May 16, 2008. In this week's example, we use a 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)

The chart above shows two signal lines - a 33% (red line) and a 20% (green line). This example clearly illustrates what was mentioned in our last week's example: "A higher signal line generates fewer trades" and "A higher signal line generates a signal earlier". The 33% line did not generate any signals for the last week and the signal that was generated on May 14, 2008 is now in profit despite the fact that it was generated somewhat early (a few days before reversal). The blue 20% signal line generates a signal to sell after the reversal, but this signal line setting generated an additional two signals (sell short and buy) on May 15, 2008.

Below we have summarized a few points about the use of higher and lower signal lines:

• A higher signal line generates an earlier signal;
•  A higher signal line generates fewer trades;
•  On average, a positive trade generated by a higher signal line would be more profitable than the average trade generated by a lower signal line, although you must keep in mind that the lower signal line may generate more positive trades during the same period of time;
• On average, a negative trade generated by a higher signal line will create a bigger loss than the average negative trade based on a lower signal line. Nevertheless, keep in mind that the lower signal may generate more negative trades during the same period of time.

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 has declined below minus 33% (the indicator will now show red), we will enter a short position (if we are not already short).
2.  Once the SBV indicator has advanced 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 has rallied above plus 33% (the indicator will now show green), we will enter a long position (if we are not already long).
4.  Once the SBV indicator has declined 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 had fallen into negative territory and has begun to rise, but has not hit 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.

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

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.

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