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Stock Market Proprietary Indicators

SVAPO –
Short term Volume and Price Oscillator

SVAPO is my homemade indicator, which we are going to study in detail here. 

VAPO is an important oscillator indicating short term reversal points to enter or exit trades.  To trade based on SVAPO; we will also introduce an ATR (Average True range) trailing stop.

Before describing the construction and application of the short-term volume and price oscillator (SVAPO), I’ll discuss some basics using an indicator as a buy and sell trigger.

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The indicator must have clear reversal points and be as fast as possible on the entry side. The faster you can get in at a price reversal, the tighter your initial stop-loss can be. This will save you a lot of money on those trades that move the wrong way.

A trailing stop-loss, which is a stop-loss order that follows the prevailing price trend, is best set in relation to your investment horizon. Are you a swing trader trying to catch all the shorter profitable price moves, or are you a medium- to long-term trader trying to stay in the trade to capture the extended bigger price moves?

Oscillator and Price Relation

There is no ideal indicator, which is why you have to protect your investment with a stop order.
Using a single oscillator as the only reference to enter or exit a trade is not a good idea. The oscillator should instead be used as an alert for having a closer look at the chart and only then make a decision, taking into consideration all possible technical analysis tools.

ideal relation between the oscillator and price

 

The Perfect Pair

Now and then the oscillator you use is perfect.

Figure 8.1, the daily chart of NCR Corp. (NCR), shows an ideal relation between the oscillator at the top of the chart and the price at the bottom.
A buy signal is given when the oscillator reaches the lower boundary and turns up.
A sell signal is given when the oscillator is at the upper boundary and turns down.

The oscillator here is as fast as it can be and marks the exact top and bottom turning points.

 

 

 

Figure 8.1: NCR daily an ideal relation between the oscillator and price.


Initial Stop

much less perfect but saved by the initial stop

 

Figure 8.2 illustrates a less-perfect scenario with the daily chart of eBay Inc. (EBAY), but it is saved by the initial stop.


A buy signal is generated when the oscillator turns up from below the lower boundary. An appropriate initial stop related to the price volatility and with no previous low available is set at 2% from the buying price.


The price moves down farther, and we are stopped out of the trade five days later with a minimum loss, thanks to the initial stop.

 


Figure 8.2: EBAY much less perfect but saved by the initial stop.

Trailing Stop

In addition to staying in a trade for a longer period of time with the longer price moves, the trailing stop also will be handy when the oscillator is not giving a sell signal. This tends to occur when the price is moving flat or consolidating in a downtrend.

initial stop at 3%

Take a look at figure 8.3 with the chart of Intel Corp (INTC).

The initial stop was set tight at 3%, below the short-term low. A normal medium-term 7% stop is used as a trailing stop.

 

The oscillator does not pass the upper boundary and, as a result, it does not create a sell signal.

 Still, the trade could be closed without a loss, thanks to the trailing stop that got you out of the trade just in time.

 

 

 

 

Figure 8.3: Intel initial stop at 3% and a medium-term7% trailing stop.

SVAPO Construction

Basic Assumptions

In order to construct a short-term oscillator based on price and volume, you have to look at the relationship between these two components in up-trending and down-trending markets.

 

These are their normal relationships:

Up-trending market

Price

Volume

 

 

 

Uptrend

Up

Up

Correction

Down

Down

Reversal

Down

Up

 

Down-trending market

Price

Volume

 

 

 

Uptrend

Down

Up

Correction

Up

Down

Reversal

Up

Up

 

Combining the relationships based on market direction leaves us with three possible conditions:

Market direction

Price

Volume

Calculation

 

 

 

 

Uptrend

Up

Up

+ Volume

Downtrend

Down

Up

- Volume

Corrections

Up/Down

Down

0

In an up-trending market, the price and the volume are moving up. When calculating the oscillator, volume will be added.
In a down-trending market, the price goes down, while the vol­ume is up. When calculating the oscillator, volume will be subtracted.
When the volume is moving down and the price is in a consolida­tion phase moving in either direction, the volume will not be taken into consideration when calculating the oscillator.

Merely combining price and volume will result in a very choppy oscillator. Using conventional smoothing tech­niques, such as moving averages, will cre­ate an unacceptable delay for a short-term oscillator. So, how can we remedy this for price and volume?

Proprietary Technical Indicators Next -Part 1 -Part 2 -Part 3 -Part 4 -Part 5

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