S&P 500: How to adjust the system to a trend:

An Example of a Trading System using the technical analysis based on the SBV Oscillator

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July 18, 2008

This week SBV example is a continuation of previous example on June 27, 2008. This example continues to illustrate this rule on the practice:

Chart 1. Relationship between the SBV oscillator and index reversal points. S&P 500 index. 60-day view. 1 bar = 1 hour. SBV(20)

1. Once the SBV indicator declines below negative signal level (the indicator will now show red), we enter a short position (if we are not already short);
2. Once the SBV indicator advances above negative signal level (after having been below that level), we will enter a long position (the indicator still shows red);
3. Once the SBV indicator rallies above positive signal level (the indicator will now show green), we enter a long position (if we are not already long);
4. Once the SBV indicator declines below positive signal level (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.

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
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 #5	Cash	1356	+6
06/17/08	rule #4	Sell Short	1356	06/23/08	rule #2	Buy to Cover	1317	+39
06/23/08	rule #2	Buy	1317	06/24/08	rule #4	Sell	1310	-7
06/24/08	rule #4	Sell Short	1310	06/24/08	rule #2	Buy to Cover	1305	-5
06/24/08	rule #2	Buy	1305	06/26/08	rule #5	Cash	1295	-10
07/01/08	rule #2	Buy	1279	07/02/08	rule #5	Cash	1272	-7
07/07/08	rule #2	Buy	1270	07/08/08	rule #1	Sell	1250	-20
07/08/08	rule #1	Sell Short	1250	07/08/08	rule #2	Buy to Cover	1270	-20
07/08/08	rule #2	Buy	1270	07/09/08	rule #5	Cash	1250	-20
07/16/08	rule #2	Buy	1230	07/16/08			1260	+30
Total:								+23

Examples of System Modifications to follow a trend

Over the last 2 months our simple system has generated 9 negative and only 5 positive signals, however, the rule #5 has protected the system from the bigger loses and the system still managed to generate positive summary return over this period.

As we mentioned several time in our previous chart examples, this system is very simple and there is always a room to improve the system and adjust it to the personal trading style and risk tolerance. For instance, the knowledge of the general market trend may help to avoid fake signals. If the analysis of the higher timeframe or other technical indicators suggest that the longer term-trend is down-trend then the system could be modify accordingly.

As an example, a conservative trader may say:

• Ignore signals to go "Long" and trade only "Short" signals - do not play against the trend.

A more conservative trader may say:

• When rule #5 triggers to go "Cash" from a "Short" position then stay in cash until a new buy signal is generated;

• When rule #5 triggers to go "Cash" from a "Long" position then open a "Short" trade.

Another trader may select different signal lines to generate "Long" and "Short" signals:

• Use plus 1% signal line to generate "Short" Signal in rules #1 and #4;

• Use minus 33% signal line to generate "Long" Signal in rules #2 and #3;

The system changes above are for the bear market, yet, vise versa system modification could be applied during the Bull market as well.

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11/21/2008 - SV3