Understanding the Coppock Curve

[RichardCox 10]

Understanding the Coppock Curve

 

First introduced by Edward Coppock in the early 1960s, the Coppock Curve (CC) is an oscillator that was originally designed to alert traders to potential shifts in an underlying market trend. For most of its history the CC has been used to send signals in long-term strategies in the major stock benchmarks. But these tools can be applied to all asset classes in any time frames as a means for generating trading signals and establishing new market positions.

 

Design and Calculations

 

“When Coppock was originally working on developing the indicator most of his focus was centered on price activity on monthly charts,” said Sam Kikla, markets analyst at BestCredit. “So for traders with a longer-term perspective, the CC might prove to be highly effective.” For the most part, CC trading signals are relatively infrequent when using monthly charts so for those looking to be more selective about their positions, this is an approach that has clear advantages. For those looking to identify a larger number of trading signals, this can be accomplished by moving down to a daily or hourly time frame.

 

In generating its signals, the CC uses a weighted moving average of an asset’s Rate of Change (ROC). This essentially means that the CC is a momentum indicator that will fluctuate and oscillate around a zero line (below and above the line). The CC is composed of three variables: a Long ROC interval (14 periods), a Short ROC interval (11 periods), and a weighted moving average (default is usually 10 periods). The number of periods is essentially an indication of the number of candlesticks used in determining the value of each CC component. To calculate the CC, we take the sum of the Short and Long ROC intervals (11 and 14 periods) and then take a 10 period weighted moving average of that sum. The mathematical formula for the CC looks like this:

 

CC = 10-interval weighted moving average of the 14-interval ROC + 11-interval ROC

 

Calculations for the ROC look like this:

 

ROC = [(Interval Close - Interval Close N periods previous) / (Interval Close N periods previous)] x 100

 

For the CC, the N variable used in the ROC calculation can be substituted by 11 and 14 (the interval period for the Short and Long ROC measurements). Two individual ROC calculations are taken. Once plotted on a chart, the oscillator looks like the chart graphic shown below:

 

 

The CC Trading Strategy

 

The key aspect of the CC is the zero line. This is the region that acts as a trigger for trading signals. A positive bias (for long positions) is seen when the CC is moving above the zero line. Bias is negative (for sell positions) when the CC falls back below the zero line. Alternatively, the oscillator can also be used as a tool for knowing when to take profits. For example, long positions should be closed if the CC turns negative. Short positions should be closed if the CC rises into positive territory. We can see a live example of this in the chart below, where green arrows show instances where the bias is bullish and red arrows show in cases where markets have turned bearish.

 

 

In the above chart, we can see that time perspective is the daily interval. If a trader was interested in receiving more trading signals (both bullish and bearish), the best idea would be to move down to an hourly chart. If a trader was looking to be more selective about the number of signals received, it would be preferable to move up to a weekly or monthly chart.

 

Alternative Settings

 

Of course, there are always additional options for changing the default settings. And when traders are looking to implement the CC in different time frames (i.e. weekly or lower), additional adjustments can help to fine-tune the indicator. When using the default settings on the lower time frames, entry and exit signals tend to happen somewhat late and this means that it is harder to capture most of the projected move. This also creates a greater potential for losses, so there is nothing wrong with adjusting the CC settings in order to capitalize on price moves on the lower time frames.

 

Specifically, you can increase the speed of the oscillations in the CC by reducing the the level of your ROC variables. This will also give you a larger number of trading signals. If you raise the level of your ROC variables, the oscillations in the CC will slow and give you a smaller number of trading signals. If you want the CC to produce exit and entry signals that are earlier, you should decrease the weighted moving average. This change can also lead to a trading signals that are sent with greater frequency. Delaying these signals can help those that are looking for more confirmation that a signal is validated, and this can be accomplished by increasing the levels for your weighted moving average.

 

Filtering-Out Poor Signals and Potentially Bad Trades

 

Any indicator carries with it the potential to send out a false signal, so it is always important to look for ways of reducing these as much as possible. One strategy to filter out potentially false signals is to wait for signals that agree with the direction of the dominant trend. These are the situations that include the potential for creating the biggest price moves (and the greatest profits). The best way to accomplish this is to identify your signal and then to move up one charting time frame.

 

For example, if you see the CC cross into positive territory on a daily chart, pull out to a weekly chart in order to make sure that the longer term trend momentum is also positive. If you notice that the CC starts to cross into negative territory, it is generally a good idea to close the position. But, for conservative traders, it would not be a good idea to reverse the trade into a new short position.

 

Points to Remember

 

To weed-out bad signals, it should be remembered that choppy price action can lead to multiple signals in both directions. This reduces the probability that each signal is giving you accurate information and increases the chances for a losing trade. For this reason, the CC is best used in cases where there is a clear trend that can be found in the market, as this will lead to more signals that agree with one another.

 

It should also be remembered that the CC gives no exact indication of where stop losses should be placed. This, of course, does not mean that stop losses should be ignored but other methods (such as plotting a swing high or swing low) should be used as a means for determining where to exit a trade. If the CC reading does not agree with your open trade, that trade should be closed. But this approach is somewhat vague and should not be used as a substitute for using a hard stop loss.

 

As a momentum oscillator, the Coppock Curve helps traders to identify shifts in long-term market trends. Many would argue that the tool is best used on monthly time frames, but there is a good deal of flexibility in place for the indicator to be adjusted with more specificity. For these reasons, it makes sense to test different settings with a demo account so that you are able to get a better feel for the Coppock Curve and match its strengths with your broader strategy approach.

[powerslave 10]

Interesting! Is there a legit MT4 indicator so we can test it ?