An Example of an Intraday NASDAQ 100 Trading System using the SBV Oscillator

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September 28, 2007

This week's SBV chart example is based on the 60-day SBV(20) NASDAQ 100 chart. The trading system described below may be applied to e-mini index futures over the short-, mid-, and long-term. The principles outlined here will work not just for the NASDAQ 100 index (QQQQ tracking stock), but will apply equally well to the Russell 2000, the DJI, and the S&P 500, as well as other indexes.

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 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).

Examples of additional rules

Please keep in mind that the trading system represented in our examples is very simple. We recommend that investors and traders adjust the system to their own personal trading styles and risk tolerances. Some traders may add rules that require the use of use a stop-loss, as well as other rules to improve the system.

Losses can be reduced by adding rules to the system. For instance:

If the SBV has fallen into negative territory close to the signal line and begun to rise without reaching 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.

Examples of additional, and more conservative, rules:

1.  After the 60-day chart has indicated that you should open a position, start monitoring the 15-day chart and open a position when the 15-day chart suggests the same and if the 60-day SBV still moves in the same direction.
2.  Close the short trade and remain in cash until a new signal is generated if the 15-day SBV suggests a closing.

An even more conservative system can use two indicators, although it would generate fewer trades. For instance:

1. Open a short trade when the SBV suggests opening the same trade on both the S&P 500 and the NASDAQ 100 indexes
2. Close the trade and remain in cash until a new signal appears if only one of the indexes (S&P 500 or NASDAQ 100) suggests a closing.

Table 1: Trades based on the SBV Oscillator.

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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