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In our trading example, we applied the following simple trading system based on our SBV indicator:

1. Once the SBV indicator declines below minus 20% (the indicator will now show red), we enter a short position (if we are not already short);
2. Once the SBV indicator advances above minus 20% (after having been below that level), we enter a long position (the indicator still shows red);
3. Once the SBV indicator rallies above plus 20% (the indicator will now show green), we enter a long position (if we are not already long);
4. Once the SBV indicator declines below plus 20% (after having been above that level), we enter a short position (the indicator still shows green).

Basically, Rules #1 and #3 in the system above have been established to cut losses and open an opposite trade if the price does not move as predicted by the signal direction. This unique feature of the system allows it to correct itself and cut losses before it's not too late. At the same time, the system above does not assume that a trader remains in "cash." As soon as one position is closed, the opposite trade is opened.

Please keep in mind that the trading system represented in our examples is very simple and uncomplicated. Although this system is considered to be profitable, it is recommended that investors and traders adjust the system to their own personal trading styles and risk tolerances. Many traders would prefer to have additional stop-loss trading strategies or rules that would protect the system (as we recommend). Traders may, for example, add rules that would require a percentage stop-loss or other rules that simulate a stop-loss and modify the system. Some may also prefer to remain in cash during uncertain situations. Losses can be reduced by adding a simple additional stop-loss rule to the system:

Rule # 5 (in addition to the four rules above): If the SBV falls into negative territory and then begins to rise without hitting the signal line, close the short position when the SBV is back in positive territory, and stay in cash until a new buy signal appears. Do the opposite for a long position.

In effect, this rule tells us that if the price moves against a previously generated signal, it is not necessary to wait until Rule #1 or Rule #3 is triggered to cut losses. The trade can be closed earlier and a trader can remain in cash until a new signal appears. In this way, the losses can be cut much earlier and should be much smaller. Some losses might even turn into a profit. Of course, there may be situations when, after a trade is closed, the trend reverses and moves in the direction of the closed trade. Then a trader might consider that he/she had lost a profitable trade. However, smaller losses will cover this unearned profit in many situations.

Below are two examples of a simple trading system. The 4-rule trading system is used in the first example, while a Rule #5 (additional stop-loss rule) is added in the second example. Although this rule makes the system more complex, it allows one to cut losses earlier and stay in cash during an uncertain situation until a new signal has appeared.

Example #1:

Chart 1. Relationship between the SBV oscillator and index reversal points. NASDAQ 100 index (QQQQ tracking stock). 15-day view. 1 bar = 15 min. SBV(16)

Table 1: Trades based on the 4-rule system.

Example #2:
(The same as Example #1 plus an additional rule)

Rule # 5 (in addition to the four rules above): If the SBV had fallen into negative territory and begins to rise without hitting the signal line, close the short position when the SBV reaches positive territory and stay in cash until a new buy signal is generated. Do the opposite for a long position.

Chart 2. Relationship between the SBV oscillator and index reversal points. NASDAQ 100 index. 15-day view. 1 bar = 15 min. SBV(16)

Table 1: Trades based on the 5-rule system.

Adding a small rule to the system may substantially reduce losses and, in some cases, even double the summary profit.

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