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Monday, September 7, 2015

Monday, 9/7/15 The Equity Oscillator - Daily

First a note on the name: the oscillator was called "Al's Indicator" which, let's face it, is kind of ......... klunky.  Since it is an oscillator based on NYSE composite daily statistics, the name Equity Oscillator - Daily seems more apt.
The Equity Oscillator - Daily (EOD) is a compilation of daily NYSE Adv/Dec, volume and momentum statistics developed by the author in the mid-1980's before the advantage of today's PC based trading platforms.  For years it was maintained by manual entry into digital spreadsheets - originally Lotus 1-2-3 and eventually Excel.  With modern digital trading platforms it is possible to generate this oscillator real time and also to back test variations of the input time frames.  The author has been doing just that in recent months.  The original oscillator had a periodicity of 7, 10 and 10 days for the three oscillator components.  The back test process revealed that oscillator values of 13, 19 and 19 days generated a more effective oscillator.
The EOD may be considered overbought at a reading higher than 2.00 and oversold below 1.00.  It is combined with a trendline analysis to provide entry and exit signals for NYSE and NYSE derived indexes and vehicles.  The trendline is usually derived by first drawing a regression line based on the daily closes for the trend in progress.  Then a parallel line to the regression line is drawn and placed above or below the daily bars (depending on the direction of the trend) such that it touches the lowest daily low or highest daily high in the sequence in a manner that doesn't dissect another daily low or high.  A picture is worth a thousand words, so here is a chart of some recent trends to illustrate the application:


Trade entries/exits are made when the EOD is at or very near overbought or oversold levels after cycling up or down from the preceding oversold or overbought level and the daily close has penetrated below or above the trendline defining the trend that has been in progress.  This is assumed to signal a change in trend.
Any trading approach needs a stop loss component.  The method employed here uses Wilder's ATR.  The ATR for the instrument traded is multiplied by 2 and added or subtracted from the entry price to establish the stop loss point.  It is the author's opinion that stop losses are disaster protection only and that setting SL's too close runs the risk of market noise preventing the trade from achieving what will ultimately be a winning position.  Also, setting a SL quantifies the trade's risk for purposes of money management.
Finally, as in any system, there are times when a trade becomes a loser.  Also, there are times when the oscillator stops oscillating.  In both these situations, what has occurred is that the time periods used in the 13-19-19 EOD are not properly defining the cycles at work.  The solution is to drop to the 7-10-10 EOD for trading signals, and once a successful trade has been generated then revert to the 13-19-19 EOD.

Below are the backtesting results for the EOD trading system.  The ES (S&P E-mini futures) was used as the trading vehicle, but any NYSE derived vehicle should work.  Because some of these trades span multiple months, if the ES were used there would need to be expiration month rollovers.  To keep things simple this was not provided for in the simulation.  If the ES were used as a trading vehicle it would probably make things easier if the out month contract were used instead of the nearest expiration.  For example, if making a trade in the month of August use the December expiration rather than September.

2013

2/21/13 Sell @ 1502.00     3/4 Buy @ 1527.50  --  25.50 loss
3/4 Buy @ 1527.50     5/23 Sell @ 1650.75 --  123.25 gain
5/23 Sell @ 1650.75     7/5  Buy @ 1629.25 --  21.50 gain
7/5 Buy @ 1629.25     7/29 Sell @ 1682.50 --  53.25 gain
7/29 Sell @ 1682.50     9/4 Buy @ 1655.00 --  27.50 gain
9/4 Buy @ 1655.00     9/20 Sell @ 1703.75 --  48.75 gain
9/20 Sell @ 1703.75     10/10 Buy @ 1683.00 --  20.75 gain
10/10 Buy @ 1683.00     11/5 Sell @ 1757.00  -- 74.00 gain
11/5 Sell @ 1757.00     11/15 Stopped @ 1790.00  --  33.00 loss
11/20 Sell @ 1779.75     12/18 Buy @ 1804.00 --  24.25 loss

2014

12/18/13 Buy @ 1804.00     1/2/14 Sell @ 1826.50 --  22.50 gain
1/2 Sell @ 1826.50     2/6 Buy @ 1768.50 --  58.00 gain
2/6 Buy @ 1768.50     3/11 Sell @ 1864.75 --  96.25 gain
3/11 Sell @ 1864.75     4/16 Buy @ 1852.75 --  12.00 gain
4/16 Buy @ 1852.75     7/17 Sell @ 1948.75 --  96.00 gain
7/17 Sell @ 1948.75     8/8 Buy @ 1923.25 --  25.50 gain
8/8 Buy @ 1923.25     9/8 Sell @ 2000.75 --  77.50 gain
9/8 Sell @ 2000.75     10/21 Buy @ 1938.75 -- 62.00 gain
10/21 Buy @ 1938.75     12/8 Sell @ 2060.50 --  121.75 gain
12/8 Sell @ 2060.50     12/18 Buy @ 2061.25 --  0.75 loss

2015 


12/18/14 Buy @ 2061.25     1/6/15 Stopped @ 2004.25 --  57.00 loss
1/20 Buy @ 2016.25     3/4 Sell @ 2096.25 --  80.00 gain
3/4 Sell @ 2096.25     3/16 Buy @ 2067.00 --  29.25 gain
3/16 Buy @ 2067.00     5/29 Sell @ 2106.00 --  39.00 gain
5/29 Sell @ 2106.00
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