An Example of an S&P 500 Trading System using the SBV Oscillator

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 January 25, 2008

 20% on the S&P 500 in two months

This week's SBV chart example is a continuation of the previous example of January 18, 2008. In this week's example, we use the same settings that were previously used to show the consistency of our trading system over a long period of time.

This week SBV chart example is a . 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.

This week's SBV chart example is based on the 60-day SBV(20) S&P 500 chart.

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 will 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 had fallen into negative territory and begun to rise without reaching the signal line, close the short position when the SBV is back into positive territory, and stay in cash until a new buy signal appears. Do the opposite for a long position.

In our Market outlook on January 23, 2008, we had written:

"A note for those who use the 60-day SBV(20) simple trading system: we recommend that you lower the negative level from minus 20% to minus 50-60% after such a prolonged Selling volume accumulation. An additional rule that may increase the efficiency of the system is this: 'If the SBV remains below minus 20% for more then 8-10 sessions in a row, lower the signal line from minus 20 to minus 50-60%."

This is one way to improve the system. When the market has moved in one direction for a prolonged period of time and we begin to see the Selling or Buying volume accumulation grow significantly (to a large green or red SBV area), it is reasonable to expect a sharper and a stronger reversal than usual. In this case, it could be a little late to close a position when the SBV has crossed the 20% level. For such a situation, an additional rule could be included:

Rule #6: If you see that the SBV is below minus 20% or above plus 20% for more then 8-10 session in a row, lower the signal line from minus 20 to minus 40-60% or raise it from plus 20% to plus 40-60% respectively.

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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