Use Coppock curve to generate trading signals

The Kobok Curve (CC) was introduced by the economist Edwin Kobok in the October 1962 Barron’s Weekly.Although useful, this indicator is not commonly discussed between traders and investors. Traditionally used to find long-term trend changes of major stock indexes, traders can use this indicator at any time and in any market to isolate potential trend changes and generate trading signals. (Also take a look: Introduction to Oscillator.)

Kobok curve

Coppock originally developed long-term monthly chart indicators; this will appeal to long-term investors because signals are very rare in this time frame. Down to the weekly, daily or hourly time frame, the signal becomes more and more abundant.

This indicator is obtained by weighted moving average of the rate of change (ROC) of market indexes such as the S&P 500 or trading equivalents such as the S&P 500 SPDR ETF. Simply put, it is a momentum indicator that oscillates above and below zero.

There are three variables in the indicator: Short ROC Period and Long ROC Period are generally set to 11 and 14, respectively; Weighted Moving Average (WMA) is generally set to 10. The period represents the number of price bars used in the calculation of the indicator. Coppock prefers monthly price bars, but traders can use price bars of any size, including 1 minute, hourly, daily, etc.

After being told by the bishop that the mourning period for ordinary people was 11 to 14 months, Kobok proposed 11 and 14 periods for the Republic of China part of the calculation. Kobok concluded that the downtrend was like a period of mourning, so he used these numbers. The Kobok curve is calculated as the 10-month WMA that is the sum of the 14-month rate of change and the 11-month rate of change of the index.

For those with a mathematical tendency, the formula is:














Kobok curve

=

(

width

rice


One


1





X

resistance

Oh


C


1

4



)

+

resistance

Oh


C


1

1

















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Where:















resistance

Oh


C

n


=

1





X



CP



CP

n

Before the period



CP

n

Before the period

















CP

=

Closing price















width

rice


One


1





=

10-period weighted moving average







begin{aligned} &text{Coppock Curve} = (WMA_{10} times ROC_{14}) + ROC_{11} \ &textbf{where:}\ &ROC_n = 100 times frac { text{CP}-text{CP} n text{ Periods Ago} }{ text{CP} n text{ Periods Ago}} \ &text{CP} = text{closing price} \ &WMA_ {10} = text{10-period weighted moving average} \ end{aligned}


Kobok curve=(widthriceOne1XresistanceOhC14)+resistanceOhC11Where:resistanceOhCn=1XCP n Before the periodCPCP n Before the periodCP=Closing pricewidthriceOne1=10-period weighted moving average

The Kobok curve is just one of many technical indicators used to guide your trading decisions.To learn more, try technical analysis Course in Investment Encyclopedia Academy, Which includes videos and real examples to help you improve your trading skills.

Kobok curve strategy

The zero line of the Kobok curve acts as a transaction trigger; buy when CC moves above zero, and sell when CC moves below zero. Investors can use sell signals to close their long positions, and then restart long positions when CC returns above zero. Traders who wish to be more active can close their long positions and start short trades when the CC drops below zero.

Figure 1 shows the basic strategy applied to the monthly chart of the S&P 500 Index. A buy signal was generated in 1991, and a sell signal was generated in 2001. This will allow investors to avoid most of the decline in the rest of 2001 and 2002. A buy signal was generated in 2003 and a sell signal was generated in 2008. This indicator will once again save investors from the remaining declines in 2008 and early 2009. Another buy signal was generated in early 2010, and the position remained open until CC fell below zero. (For more information, see: Explore oscillators and indicators.)

Figure 1. Monthly S&P 500 index chart with Coppock curve

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Source: Freestockcharts.com

In Figure 2, this strategy is applied to the daily chart of the S&P 500 Index. More signals are generated, attracting more active traders who want to enter and exit the market on each price wave.

Figure 2. S&P 500 daily chart with Coppock curve signal

Source: Freestockcharts.com

Adjust settings

Although typical indicator settings work well on monthly charts, they may not work well on weekly or shorter timeframes. For example, in Figure 2, entry and exit occurred a bit late in the movement, and most of the profits could not be obtained from price fluctuations, and would result in the loss of many transactions.

Decreasing the rate of change variable will increase the speed of CC fluctuations and increase the number of trading signals​​. Increasing the rate of change variable will slow the volatility and generate fewer signals.

If you wish to receive earlier entry and exit signals, please lower the WMA. The number of trading signals may also increase with this adjustment. To wait for more confirmations and receive later entry and exit signals, please increase WMA; this may also reduce the number of trading signals.​​​

By reducing the WMA to 6 (instead of 10), the entry occurs earlier in the upward movement, and the exit (and potential short trade) occurs earlier in the downward movement. In Figure 3, the vertical lines in the price part of the chart reflect the entry and exit based on the typical settings (14,11,10), while the vertical lines in the Coppock curve part of the chart reflect the entry and exit based on the adjustment settings (14,11,10). 11,6). The adjusted settings move the entrance and exit slightly to the left; such adjustments can have a significant impact on profitability or loss.

The adjusted setting also created a new buy and sell signal in April 2014, and there is no mark on the chart.

Figure 3. S&P 500 daily chart with adjusted Coppock curve settings

Source: Freestockcharts.com

Filter transactions

Active traders may wish to receive trading signals only in the same direction as the dominant trend, because this is where most of the profits are. On the long-term chart, pay attention to the trend direction. If you trade within the daily time frame, the long-term chart will be weekly. If the weekly Coppock curve is higher than zero, only long trades are made on the daily chart. Sell ​​when a sell signal appears, but do not trade short, as this will run counter to the dominant trend.

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If the dominant trend declines, only short trades within a short time frame. Exit a short position when a buy signal appears, but do not open a long position, as this will run counter to the main downtrend.

Adjust the settings of the indicator within the two time frames to create the number of trading signals you are satisfied with. (Also take a look: Keep it simple and follow the trend.)

Precautions

When the price fluctuates sharply, especially in a small time frame, multiple signals may be generated, resulting in a large number of very short-term and possibly unprofitable transactions. This indicator is most suitable for trending markets, which is why establishing a dominant trend in a longer time frame can help filter out some potential bad trades in a lower time frame.

The strategy does not include stop losses to limit the risk of each trade, but traders are encouraged to implement their own stop losses to avoid excessive risk. When opening a long position, the stop loss can be set below the recent swing low, and when opening a short position, the stop loss can be set above the recent swing high. (For more information, see: Stop Loss Order-make sure you use it.)

Bottom line

Coppock Curve is a momentum oscillator, originally designed to point out changes in the long-term trend of stock indexes. It is a good indication of these trend changes on the monthly chart. Short-term traders can also use this indicator. For these shorter time frames, some adjustments to the settings may be required. Traders are encouraged to test the strategy in their own market and time frame, and make appropriate settings adjustments before implementing the strategy in the actual market. (For more reading, please check: Create your own trading strategy.)

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