SBV Trading System

When volume technical analysis is applied to intraday trading systems, it can be a challenge. The SBV (Selling & Buying Volume) Oscillator could help to incorporate simple rules based on volume analysis into simple mechanical trading system. This simple system would trigger a sell signal on changes in money flow from bullish into bearish and respectfully a buy signal would be generated on an occurrence of change in money flow (volume) from bearish into bullish.

The SBV Oscillator can be traded with the simple trading system that uses four basic rules. Of course, anyone who decided these rules should adjust them so that they suit the personal trading style. For instance, you may wish to set profit targets, formulate additional rules, apply a stop-loss strategy, trailing stop, include additional indicators etc.

Based on the SBV indicator, 4 simple trading rules are listed below. To show how the system works, the 20% level for the SBV indicator is used for illustrative purposes only.

Depending on your personal trading style and risk tolerance, the critical levels you select for the SBV Oscillator may have to be adjusted. As well as depending on the number of trades you wish to generate within that timeframe, you may select these critical levels based on the timeframe you wish to analyze. For these purposes it is recommended to have ability to test this technical indicator in the most recent history at least. In some cases, good results are provided from an SBV critical level of 30% on hourly charts (1 bar = 1 hour). From the history analysis you may notice that lower critical levels generate more trades.

To trade long:

1. Wait for the SBV indicator to advance above minus 20% level after being below that level, then open a long trade;
2. Open a long trade (if you are not already in long) once the SBV indicator advances above plus 20% after being below this level;
3. Take profits from the long position once the SBV indicator drops below plus 20% after being about that level;
4. Take a loss when the SBV indicator drops below minus 20% if you are in the long position.

Respectfully the similar four rules are set to trade short:

1. Wait for the SBV indicator to drop below plus 20% after being about that level and then open a short trade;
2. Open a short trade (if not already short), once the SBV indicator declines below minus 20%;
3. Take profits from the short position when the SBV oscillator has moved above minus 20% after being below that level;
4. If short position is opened, take a loss when the SBV indicator advances above plus 20%.

There is an evident relationship between price (i.e., index levels) and volume. An index changes direction when an increase in volume ultimately affects price movement. An index will react with a push lower when volume to the price up-side dominates. The opposite is also true: Prices tend to move higher in reaction, when volume to the down-side dominates. This knowledge allows you to achieve higher profits, to place trades with more confidence and build a successful trading system.

All you have to remember that volume reveals money flow. Only by using volume based technical analysis a trader may tell when the market, index or stock tends to be overbought or oversold. Only volume based technical indicators may tell you where the money go - in or out of the market. Furthermore, it would be logical to have at least one volume based indicator in any trading system.