Dow Jones Industrials (DJI):
An Example of a Trading System using the SBV Oscillator

October 10, 2008

DJI SBV beats stock market crash

+20% on the DJI in a week

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This week SBV chart example is based on the 30-day SBV(20) DJI (Dow Jones Industrials) chart. This week SBV chart example is a continuation of previous example on October 3, 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.

Since July 24, 2008 we have been paying close attention to Dow Jones Industrial 30-day SBV(20) - the result exceed all our expectation.

Chart 1. Relationship between the SBV oscillator and index reversal points. DJI index. 30-day view. 1 bar = 30 min. 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 red), 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 red);
3. Once the SBV indicator rallies above plus 20% (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 20% (after having been above that level), we will enter a short position (the indicator still shows green);
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.

Improve the system by cutting losses:

In spite 358 points loss on 9/18/2008 the simple trading system has generated more than +8% profit on DJI over the last month. It could be recommended adopting additional stop-loss rules that match personal risk tolerance. The system presented below is very simple. Before using it in actual trading, we recommend that you fine-tune the system to best suit your personal trading preferences and risk tolerance. For instance, you may create additional rules to take a loss if prices move 150 points against your position. In our example, an adherence to this rule would have reduced our losses by 228 points.

Improve the system by protecting profit

We stated in our daily market outlook "As we already mentioned in January 2008 and in September 2008, when the SBV hit extremely low levels it is recommended to reduce the negative level from minus 20% to minus 60-70% after such strong bearish volume accumulation. This is for those who use our 60-day SBV(20) simple trading system. The reason is that it could be enough to confirm a recovery. The odds for a continuation of this afternoon's rally are increasing." - the same principles could be applied to the 30-day chart. When we have extremely oversold market defined by big bearish SBV accumulation (a lot of red) and when SBV hitting extremely low negative levels it could be wrong to wait until SBV rises to minus 20% to close position. Waiting when minus 20% levels is hit could wipe out major part of the profit.

We represent our system in simple way in order to deliver the main points of using the SBV Oscillator. Yet it does not mean the the system is perfect and there is no room for improvement. Every trader has to adjust this system to the personal trading style and risk tolerance and develop some rules that not only help to cut losses but which help to protect profit as well.

In the current market condition when the SBV hit minus 100% level and started to advance a trader may set stop when he/she is willing to pocket the profit. As an example a riskier trader may close the short and open a long position when SBV rises to minus 70-60% (after such strong oversold levels). On the other hand more conservative trader may close the short position when SBV rises to minus 70-60% and stay in cash until SBV climbs to minus 20% and only then open a long position. Another trader may close the short position when SBV rises from minus 100% to minus 80% and open a long position when SBV is above minus 50%.

As you see different implementation of rules could be set depending on your personal trading style, how you fill about market and what other technical indicators tell you. The main point is that the rising SBV indicates Bullish sentiment and after such low negative SBV when the market is strongly oversold and is extremely volatile (DJI can make 5% up or down very easy) it could be too late to close the short position when the SBV reach minus 20%.

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
09/15/08	rule #4	Sell Short	11131	09/17/08	rule #2	Buy to Cover	10909	+222
09/17/08	rule #2	Buy	10909	09/17/08	rule #4	Sell	10825	-84
09/17/08	rule #4	Sell Short	10825	09/17/08	rule #2	Buy to Cover	10721	+104
09/17/08	rule #3	Buy	10721	09/17/08	rule #4	Sell	10602	-119
09/17/08	rule #4	Sell Short	10602	09/18/08	rule #2	Buy to Cover	10960	-358
09/18/08	rule #2	Buy	10960	09/22/08	rule #4	Sell	11197	+237
09/22/08	rule #4	Sell Short	11197	09/25/08	rule #2	Buy to Cover	11016	+181
09/25/08	rule #2	Buy	11016	09/26/08	rule #4	Sell	10943	-73
09/26/08	rule #4	Sell Short	10943	09/30/08	rule #2	Buy to Cover	10767	+176
09/30/08	rule #2	Buy	10767	10/02/08	rule #4	Sell	10597	-170
10/02/08	rule #4	Sell Short	10597	10/09/08			8451	+2146
Total:								+2262 (+20.3%)

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).

 More Examples:

Date	Index	Timeframe	Result	Number of Trades
Oct. 3, 2008	DJI	30-day	+2,262 points (+20%)	5 "Long" and 6 "Short"
Oct. 3, 2008	DJI	30-day	+958 points (+8.3%)	8 "Long" and 9 "Short"
Sept. 26, 2008	S&P 500	60-day	+74 points (+5.8%)	7 "Long" and 7 "Short"
Sept. 19, 2008	S&P 500	60-day	+114 points (+9.0%)	6 "Long" and 7 "Short"
Sept. 12, 2008	DJI	30-day	+1,232 points (+11%)	5 "Long" and 5 "Short"
Sept. 5, 2008	DJI	30-day	+734 points (+6.3%)	5 "Long" and 5 "Short"
Aug. 29, 2008	DJI	30-day	+600 points (+5.2%)	6 "Long" and 6 "Short"
Aug. 22, 2008	DJI	30-day	+995 points (+8.7%)	5 "Long" and 5 "Short"
Aug. 15, 2008	S&P 500	15-day	+41 points (+3.2%)	7 "Long" and 8 "Short"
Aug. 8, 2008	S&P 500	15-day	+44 points (+3.5%)	6 "Long" and 7 "Short"
Aug. 1, 2008	S&P 500	15-day	+45 points (+3.6%)	4 "Long" and 8 "Short"
July 25, 2008	S&P 500	15-day	+28 points (+2.2%)	1 "Long" and 3 "Short"
July 18, 2008	S&P 500	60-day	+7 points (+0.0%)	9 "Long" and 5 "Short"
July 11, 2008	S&P 500	15-day	+103 points (+7.8%)	4 "Long" and 6 "Short"
July 3, 2008	S&P 500	15-day	+69 points (+5.2%)	4 "Long" and 6 "Short"
June 27, 2008	S&P 500	60-day	+62 points (+4.4%)	7 "Long" and 6 "Short"
June 20, 2008	S&P 500	60-day	+113 points (+8.5%)	4 "Long" and 2 "Short"
June 13, 2008	S&P 500	60-day	+108 points (+8.1%)	4 "Long" and 2 "Short"
June 6, 2008	S&P 500	15-day	+47 points (+3.4%)	7 "Long" and 10 "Short"
May 30, 2008	S&P 500	60-day	+201 points (+15%)	4 "Long" and 3 "Short"
May 23, 2008	S&P 500	60-day	+222 points (+16%)	3 "Long" and 4 "Short"
May 16, 2008	S&P 500	60-day	+243 points (+18%)	4 "Long" and 3 "Short"
May 9, 2008	NASDAQ 100	10-day	+97 points (+5.1%)	10 "Long" and 10 "Short"
May 2, 2008	S&P 500	15-day	+31 points (+2.2%)	7 "Long" and 9 "Short"
April 25, 2008	S&P 500	60-day	+251 points (+18%)	7 "Long" and 8 "Short"
April 18, 2008	S&P 500	15-day	+91 points (+6.6%)	3 "Long" and 3 "Short"
April 11, 2008	S&P 500	15-day	+39 points (+3.0%)	4 "Long" and 5 "Short"
April 4, 2008	NASDAQ 100	5-day	+93 points (+5.2%)	7 "Long" and 6 "Short"
March 28, 2008	S&P 500	60-day	+29 points (+2.1%)	6 "Long" and 7 "Short"
March 20, 2008	S&P 500	5-day	+53 points (+4.2%)	3 "Long" and 4 "Short"
March 14, 2008	S&P 500	5-day	+77 points (+6.0%)	6 "Long" and 5 "Short"
March 7, 2008	S&P 500	60-day	+222 points (+15%)	9 "Long" and 9 "Short"
Febr. 29, 2008	S&P 500	60-day	+211 points (+14%)	8 "Long" and 8 "Short"
Feb. 22, 2008	S&P 500	15-day	+85 points (+6.4%)	4 "Long" and 5 "Short"
Feb. 15, 2008	S&P 500	60-day	+211 points (+15%)	7 "Long" and 7 "Short"
Feb. 8, 2008	S&P 500	60-day	+214 points (+14%)	6 "Long" and 6 "Short"
Feb. 1, 2008	S&P 500	60-day	+246 points (+17%)	5 "Long" and 5 "Short"
Jan. 25, 2008	S&P 500	60-day	+330 points (+20%)	5 "Long" and 5 "Short"
Jan. 18, 2008	S&P 500	60-day	+330 points (+22%)	4 "Long" and 5 "Short"
Jan. 11, 2008	S&P 500	60-day	+309 points (+21%)	5 "Long" and 5 "Short"
Jan. 4, 2008	S&P 500	60-day	+291 points (+20%)	4 "Long" and 5 "Short"

 

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10/12/2008 - SV3