The 4Vo Indicator Revisited - Technical Analysis of Stock Trends

TradingWith The Trend
The4VoIndicator
Revisited
areequally weightedandcoveredin theValueLine
InvestmentSurvey,a popularinvestmentservice.
This index consistsprimarily of mid-cap stocks
andis thereforemore representativeof underlying
s trend-following traders,we understandthat market movements.
Fortunately,you only needtobeconcernedwith
successdependson identifying and trading
with the price trend of the markets.We have the weekly closeof this index:
come to appreciatethe saying that "the trend
onlywhentheweekly
closeisat
A buysignaloccurs
is yourfriend." More than 20 yearsago, Martin Zweig,
week's
A sell
close.
least
4%higher
thantheprevious
in his book Winning On Wall Street,featured a simple
closeis at least
signaloccursonlywhentheweekly
indicator designedto help an investor follow the price
week's
close.
4o/olower
thantheorevious
trend of the markets.Zweig called this the 4Voindicator. In his book he illustrated that for the 22-yearperiod
endedlate 1988,if an investorfollowed this indicator,a
You only need to look at the Value Line index
modest$10,000investmentwould havegrown to more oncea week andperform thenecessarycalculation
than$233,000! This is anapproximateI 5Vocompounded to determineif any action needsto be taken. For
annualrate of return - a remarkablereturn that sisnifi- example,assumethe weekly closeof the index is
cantly exceededmarket returns.
316.69. To initiate a trade, the index must close
But that was then.Due to changingmarketdynamics, the following week 12.67pointshigher (buy) or
many indicators appearto work for a certaintime and as lower (sell). This is 47o hrgher or lower than the
conditions change,the indicator loses its effectiveness previousweekly close.
despitewhat backtestingresultshave shown.
If this does not happen,you do nothing. In
This article revisits the 4Vomodel and exploresits ef- this case,let's assumethe Value Line closesthe
fectivenessin currentmarketconditions.Is thisindicator following week at 330. Since 330 is 4Vohtgher
still relevant 20 years later? To find out, I developeda than the prior week's close of 316.69,you will
trading model.
initiate a buy. You would hold this position until
the index closes 4Voor lower than the previous
TH.N4Vo INDICATOR
week. Continuing with the example,assumethe
Often,thesimplertheindicator,theeasierthemodelis to market rallies and four weeks later the index is
execute.It doesn't get much simpler! As Zweig showsin now at 355. The next week, the index closesat
his book, the4VaindicatorusestheValueLine Composite 337. Since331is 4Volessthanthepreviousweek's
Index to generatethe buy and sell signals. The Value closeof 355, you exit your position.The result is
Line Compositeis a collectionof 1,700companiesthat a gain of approximately6Va.Now let's develop
the model.
Thissimpletime-testedindicatorallows investorsto tade
with the trend to achieve above-averagereturns.
o
E
f
E
o
@
by Michael J. Collins
o/ STOCKS & ColffrlOOntpS
BonusIssue2010o Teclnical Analysts
. 13
(January
M0DEL
SIGNALS
1, 2001-November
2, 2009)Tradesymbol:
IWM
SIGNAL SIGNAL ACTION
DATE
DATE
o/o
PROFIT TIME
$1,000,000
grovrtth
Invested
(DaYs)
IWM
BUY
THB rnnuING MoDEL
This long/short model
is mechanical in
$1,000,000.00
nature.
All
buy/sell
decisions
are clearly
$922,279.79
Buy
11121200111161200196.50
Sell*** 31161200131191200189.00
-7.77%
62
9qy,_ 1|42991__4'16!,09\ eq.50
-16e%
zB
$s06,735.7s defined and based on price usingthe 470
Sell.**
8.84/0
63
$986,889.19 indicator.The model will usetheValueLine
611512001 611812001 98.50
_Buy__ 9l2p-t?fd1
105___91,170€40.U index to generatethe buy and sell signals.
.-, 19ll?99\_ _9_020__,13-58?q__
Sell.** 6n12002 611012002
93.80 16.96% 252 $1,368,684.89The exchangetraded fund (Ern) used for
71.80 23.4s% 133 $1,689,698.41trading purposeswill be the Russell 2000
lyy _-,t01$l2nz__10121t2002
Sell.*- 11241200311271200374.00
3,06%
98
$1,741,471.89 i-Share (Iwna). Iwu is extremely liquid,
trading more than 50 million sharesdaily.
Sell*** 91261200391291200397.25
31.9b% 189
$2,307,255.48 Go long Iwlt on the buy signal and
Buv
10/3/2003 10/6/2003102.20 -5.09%
7
89,81
6.77
$2,1
hold the position until a sell signal occurs.
Sell*** 413012004 51312004
111.60
9.20o/o 210
$2,391,228-49
You then closethe long position and initiate
Brty__812012004
1.917o-----_11?___9'232004_Wlf
__$2,436,86;i.5il
Sell*** 1n,2005 111012005
122.00 11.45% 140
92,715,792.80 a new short position at the openingthe next
512312005
tg
0.53%
133
$2,730,262.19 tradingday.Again,thepositionis helduntilthe
_eg_5402001
l4
31212007 3151200776.09..
Sell...
25.41o/. 651
$3,423,908,53 next buy signal,at which time the positionis
Buv
72.54
4.67%_ a36____$!,E!!,091s3
closedanda new long positionis established.
__41lnw_ _21412008
Sell--*
21812008 211112008 69.66
7
-3.97"/o
$3,441,372.94 The investoris either long or shortthe Iwu.
41412008
Buv
-287%
56
$3,342,568.09 Remember,the buy/sell decisionsare made
___A112008 71.66
Sell... 612712008 6/30/2008 69.86
-2.51o/.
84
$3,258,607.41 usingthe ValueLine index andthe tradesare
Buv
10/31/2008 11/3/2008 53.48
23.W"
126
$4,022,649,63 executedusing lwu.
Sell*** f n12008 111101200851.74
-3.25fo
7
$3,891,770,60
The model results in this summary have
Buy 11128120081?111200846.12 10.86% 21
94,s14,4s4.82 beenbacktestedfrom 2001;that is the first
Sell--* 111612009 112012009 45.88
-0.52o/.
50
$4,292,042.98
full yearthat i-Sharestradedon the Russell
Buv
2/6/2009
2/9/2009 46.79
-1.98%
20
$4,206,913.09
Sell... 211312009 211712009 43.00
-8.10%
I
$3,866,152.23 2000. For the purposesof this article, we
Buv
3fi312005 3/16/2009 39.81
7.42%
27
$4.152.966.78 will refer to the model as the TT.
Sell.-. 511512009 511812009 48.30
21.33%
63
$5,038,640.94
Buv
5/2912009 6/1/2009 51.36
-6.349i,
14
$4,719,422.69 PBnnonvTnNCESUMMARY
Sell**. 10/30/2009 fiU2009
56.63
10.26%
154
$5,203,678.09 As Figure 1 illustrates,utilizing the TT
model producedinterestingresults.A hyTOTAL
RETURNpothetical $1 million has grown to more
TTModel
420.37o/"
than $5 million in approximately nine
Russ2000Index 16 .5 9 %
years, producing a total return of more
S&P500Index
-21.52%
than 400Vo. This equals an approximate
dividend
andinterest
earned -.Adjusted
for2-'l split June2005 ---Sell/short
-Excludes
207o compounded annual rate of return
FIGURE
1: TRADII{G
SlGl{AtSGEI{ERATEO
BYTHETTM00Et. Hereyouseethegrowthof $1millionol capital
and comparesfavorably to the returns that
period,
Within
a nine-year
thismodelproduced
a totalreturn
of morethan400%.
Zweig produced in his study more than2}
yearsago.
Figure2 summarizestheresultsproduced
0UF"REVtsrD
9l+N
by the model under three different condi{S fD ll,,lEcfsEF,toUs
tions.This allows you to seereturnsacross
THF
D E }A T FINTd
different risk parameters:
ECOrloUV
fo MAKI
Btt,-__ 321.!L3__,_3Q4/29W
qa
_ ruLq,, _o.!yb _ 5_6___$t,74q.!gt
0F
Ecovo&lc
Abvrsftl
tr 6RoWJ
dr
chfulA14*14 . BonusIssue2010. Technicat
Anqlysis
af SfocfS
& COuvoltftes
Scenario I (all trades).' Use all the
signals.
Scenario 2 (long only): Only go long
on the buy signals and exit on the
sell signals.Go to cashuntil the next
buy signal.
Scenario 3 (short only): Only sell short
on the model sell signals and close
position on the buy signals.The rest
of the time, remain in cash until the
next sell signal.
ldentlfying
group rotation is essential I
"Thevarious
industry
groups
constantly
rotatebetweenstrength
andweakness.
Because
the industry
groupplaysa majorrolein howa
stockperforms,
identifying
group
rotationin realtimeisessential
to
successful
trading.".,,
Experienced
tradersknow that identifying
grouprotationin its earlystagesis extremely
valuable
information
- and morethana
littletricky.EnterDynamicTrendprofile.
With it'sproprietary
grouprotationscreen,
you canidentifyat a glancewhen a grouprs
startingto rotate.Thenwith a click,you can
identifythe stockstradingin the direction
of the group'strend- all in real-time.
This
- TomJoseph
criticalpieceof informationisjust one reason
DynamicTrend Profile hastakenthe market
by storm,and a greatreasonfor you to check
out a FREE
onlinelivedemotodav!
nilfiw
5*rEqqE
,
_!
.- .- +- !
a a As
u,*[UIlltl;,J,!J
so*.
sirii;
i .i q
r
u'irflEEllulduil
--e
ldentify Real-Time
group rotations
in the following markets:
;-"i!(+
aa-.h
usdUilgUU[Ud
-A--
figeg
-=eg ilrgd
;cXfifr8c
;,ifE reil88q8
ilgcc
;d8&88fr
gqgd
ggsEf,f,qqg
USStocks(102 industrygroups)
Euro Stoxx600 (18 industrygroups)
Indian NSEStocks(37 industrygroups)
AustralianStocks(10 industrygroups)
SaudiArabia (8 industrygroups)
FOREX(20 currencypairs)
iljEEilrE
0t[[
ie*figfie
ili8E
FRFElive online demonstrationat
metastock.com/dtsc48
or eontact a salesexpert at
0are
%
ge4,s$fiS,g€e
il EF&tr
Quicklyidentifywhen a group rotates
from weakness(red)to strength(blue)
1-900-466-6209
rrp
'TFi! r\ neirer d ,oitcrar,o .o o.v o, spr dny1/pe
0t ind^cra 'n,l LTents,ro ,-!e-deda . -\es.ne"l
Ie.oTne_dd'ro-..A,l i vesrenfLdoirq nvovesn ul',orp
ruosa r ar 1s's ot roleldry o-s.NO qtpRFSE\A tON.s
BEI\CVADt I hAr A\Y A!COUNTWil I ORtSI t\tL/ 'O
acHFvL pRof,T(oR Lossts \,MtLAqTO InOSt StOWN.
]N FACI THERE
AREFRIQUENTLY
SHARP
DIFFERENCES
BETWEEN
HYPOTHET]CAt
PERFORMANCE
RESULTs
OR
TESTIMONIALS
AND THI ACTUALRESULTS
SUESEQUENTLY
ACHIEVED
BYANY PART]CULAR
TRAD]NG
PROGRAM.
j ODYNAMIC ffif \,_,,,tPRoFrLE
i
%t
**1*'*****i**r***ugffi*try?****r**o*
FOREX,& OPTIONSI
I Designed for STOCKS,fTUTURES,
'
AllTrades
years
8.84
SUMMARY
TestPeriod
Timeinmarket
SUMMARY
TestPeriod
Timeinmarket
%Return
model
%Return
index
S&P500%return
Total
Trades
99%
%Return
model
%Return
index
420.37"/'
16.59%
S&P500%return
Total
Trades
Profitable
Losses
gain
Average
-21.520io
Average
loss
'4.01T0
29
18
62.070/"
11
37.93/"
12.76o/o
Average
dayspertrade
Average
daysinwinning
trade
Average
daysinlosing
trade
Longest
trade(days
held)
trade(days
Shortest
held)
0nlybuys
years
B,B4
63%
169.91%
16.59%
I
-21.521"
tc
Profitable
60.00%
40.00%
I
o
L U JJC J
gain
Average
loss
Average
lsthe4%indicator
still
releyant
20yearslater?
1538%
'4.351o
Figure 3 shows the annual
returns of the TT model vs. the
Russell 2000 and Standard &
Poor's 500 indexes.
To summarize:
111
159
31
oc l
r The model produced 29
trading signals over the
pasteight-plusyears.
7
S&P500%return
%Timeinwinningtrades
B9%
%Timeinlosing
trades
11To
Finally, the model seems
to hold winners and cut
lossesquickly. On average, a losing trade was
held only 31 days, while
winning trades were held
more than four times longer (159 days).
FIGURE
2:M0llEtRETUBT{S
lt{DIFFEREI{T
(1fl2001SGEI{ARIOS
112f2O0).
Thefirst
scenarjo
uses
alltrades,
thesecond
scenario
uses
long
signals
only,
andthethird
scenario
uses
short
signals.
Several points are worth noting:
r In all three scenarios,the TT model performanceresults
significantly exceedthe buy & hold index returns.
r The win/loss ratio is consistentacrossall scenarios,but
the winning trades are almost three times as large as the
losing trades.Interestingly,Zweig producedsimilarresults
using this indicator more than 20 yearsago.
r The TT model produced
positive returns in every
year but one (2007). The
model underperformed
the S&P 500 in just two
ofthe last nine years.
10.14T0
r
The worst year for the model was 2007. Investorsexperienceda -2.247oreturn.
r The timing model significantly outperformed in flat to
down markets.This was especiallytrue in 200I,2002,
and 2008.
ANNUAT
TT MODEL
RETURNS
VS.INDEX"
gh11lzl0sl
(throu
2001-09
# Trades TTM0DEI RUSSELL
2000 S&P500
Adv an ced algorithm s deliv er
low lagr low noise analysis.
Voted#1
2010Readers'ChoiceAwards
Plug-lnSoftwareCategory
Als0tot:AmjBroker,
Wealth-Lab,
MetaTrad€t
Wavewige,
Excel,
Investor/RT,
Bi0Comp
Prolit,
Ne0Ticker,
Tradecision,
Tradingsolutions,
MATLAB,
Tradestation,
Ninja
Trader,
esiqnal,
Neuroshell
Trader,
Financial
j0.
Data
Calculatot
Genesis
TradeNavigator
andTradersslud
For more informationcircleNo. 2
16 o Bonus
Issue
2OlO.Technical
Analysis
of STOCXS
& COVVOOnIES
2001
2002
2003
2004
2005
2006
2007
2008
2009ytd
Standard
Deviation
4
z
40.59%
26.90%
A
33.07To
21.43%
4.15To
16.95%
z
z
0
'l
-2.24o/o
7
34.18%
1.03% -13.04%
-21.580/0 -23.37%
45.370/0
17.00%
26.38%
8.99%
3.32Yo 3.00%
17.00% 13.62To
12.97o/o
-2.750/0
3.53%
-34.80V" -38.49%
12.87%
14.720/0
14.33%
23.30Yo
20.60Yo
dividend
reinvestment
-Excludes
FIGURE
3: A]{]{UAIRETUBT{S
0FTHETTM00EtVS.THElllDEXES.
Thismodel
produced
almost
20times
thereturn
while
oftherespective
benchmarks
incurring
risk.
lower
ENTRYHighor low Max.%
STGNAL
PRICE afterentry drawdown
111612001
Buv
96.50
87.51
90.50
98.50
88.75
102.40-
-9.32%
31512007Sell
76.09
-1.93% 211112008Sell
-3.967o- 41712008 Buv
69.66
71,66
85.74 -12.68/"
_3/ig?001_-9ql qe.qo--11q0-_- --1,152q-_ 4!QA99 ?t:t__l?.9!
_-_@42*__!411e
.3.70t0
411612001Buy
6/18/2001 Sell
Drtzoor guy
Je!
_qq20q2___
1012112002
Buy
112712003
Sell
stzqlzow-tsiy929/2003*Sell
10/6/2003Buy
51312004Sell
812312004Buy
'1110/2005
Sell
512312005
Buv
80.20
93.80
71.80
74.00
ttn
97.25
102.20
111.60
109,47
122.00
121
.35
7a.os
-2.68r" 6/30/2008seir
69.86
72.24
68.23
-86,05
-4.79"/o
-2g.fi"to
Thesimple4o/o
indicator
has
stoodthetest
ol time.
94.55
-.80%*11h07/ooa
11/3/2008
L Buy_
_!148*__{!ls _!.ltj4
71.60
-0.[s%
seii it.tq
sti+ o.ooy"
75.00
-1.35% 121112008
Buv
46.12
41.96 -9.02%
-7r95----2.si"r"
ttzoizlos Seir 45.88 47.49 -3.51%
Finally, the model signals
102.70 -5.602" 21912009B.y__16.7L__4qq0_
--qLoZ"
100.28 -1.88% 2t17t2009 Sell 43.00 43.62 -1.44% seemto have validity when
118.08 -5.81%-anizooe
3t1612009Buy -+€io-39,81 38.43 -3.47% applied to other ETFs.Figure
107.88
l.qsu
Setr
srso -a.gqdr"5 showsperformanceretums
129.28 -5.970/" 611
/200e _Bg1_ \1 e_47?7
-7e6% when the model signals
120,30 -0.87T" 111212009 Sell
56.63
62.44r
are applied to three other
.Priceasof 12131/09
indexes: the Nesoeq 100,
the
S&P500, andtheRussell
FIGURE
4: ItBAWD0llllt{S
PR0DUGED
BYIHE TT M0DEL.Forthe29tradingsignals,
percentage
srgtheaverage
drawdown
between
percentage
nalswas-5.02%.
Themedian
drawdown
between
signals
was-3.61%.
Thelargest
drawdown
between
signals
was-23.17%, 3000.Withoutexception,the
in2008,
occurring
model retums significantly
outperformedthe respective
index returns.
INDEX
RETURNS"
11112081
through111212009
CoNcr-usroN
The TT model signals are mechanical and basedon price. The
strategyis clearly designedto keep the investor in tune with the
NASDAO
1OO s&P500 Russell
3000 price trend of the market.All entry and exit signalsareexecuted
accordingto the 4Vomodel indicator,without regardto personal
Trade
symbol
0Q00
IW
IWV
biases.
The results show that the model has been successfulin
TTmodelreturns
99.65%
101.620/0
136.521o
this pursuit.Given theresults,the simple4Voindicatorhasstood
-28.810/o
-21.52%
Index
returns
-1 6.88%
the test of time, exhibiting a superior 4}-year track record.
. Exclusive
ofdividend
reinvestment
Of course,past performanceis not a guaranteeof future results.At the least, the 4Voindicator appearsto be a helpful tool
FIGURE
THETTMODEL
5: APPtYlllG
T00THER
|I{DEXES.
Hereyouseetheperformance
returns
whenthemodel
signals
areapplied
tothreeotherindexes:
theNASDAQ to identify and trade with the trend.
100,theS&P500,andtheRussell
Without
3000.
exception,
themodel
returns
significantly
outperformed
therespective
index
returns.
Michael Collins has been in the securities industry for more
than 28 year.s.He currently is a senior vice president of investments and senior portfulio manager in the Pup program at
I Finally, it appears investors experienced less risk (as Uns Financial Services.For more inJormation on this or other
measuredby standarddeviation) by using the TT model trading systems,he can be reachedat [email protected]
vs. buying and holding the indexes.In short,this model by phone at 888 277-8607.
produced almost 20 times the return of the respective
benchmarkswhile incurrins lower risk.
SuccBsrBD READING
Achelis, StevenB. [2000]. TechnicalAnalysis From A Tt Z,
To further measurerisk and volatility, Figure 4 shows the
McGraw-Hill.
maximum percentage(Vo) tnrealized Ioss an investor would Colby, R.W., and T.A. Meyers [988]. The EncyclopediaOf
have been exposedto between signals (otherwiseknown as
Technica LMarket I ndicators, Dow Jones-Irwin.
drawdowns).
Kargenian,Bob [1992]. "The 4VoModel," TechnicalAnalysis
To summarize:
o/Srocrs & Covmootrms, Volume l0: March.
Peterson,Dennis D. [2001]. "Intraday Intensity,"Traders.com
t For fhe 29 trading signals, the average percentage
Advantage,December10.
drawdownbetweensignalswas -5.02Vo.
Zweig, Martin [1986]. Winning On Wall Steet, Warner
Books.
f The median percentage drawdown between signals
was- 3. 61V o.
f
The largestdrawdownbetweensignalswas -23.1'77o,
occurrins in 2008.
FflTil
Bonuslssue2010. TechnicalAnalys,s
r/ STOCKS & COVtrrtOOtflnS . 17
r
lrNprcAroRsI
\. '*"
!
\
!t-
\.*;
s
Interpretation,
Application,Preference
SmoothingThe Ride
With Moving Averages
There are many ways to smooth out fluctuations in the
movementoJprices. So what's the best?
by Edward Donic
ecauseofthe daily volatility ofprices, investorsuse
many methods to smooth out these fluctuations
to analyze longer time frame trends in price
movements.Two common methods are the simple
moving average(Sv,+ or MA) and the exponential
moving average (Eue). Both are calculated for a
variety of time frames. They can also be combined
to create other indicators and sisnals. Which is
better? We will examine two frequently used time frames,
20 days and 50 days.
18 . BonusIssue2010. TechnicalAndlyslro/ STOCKS & CON{NAOotflgS
tz
Stupln MovING AvERAGE
tc
l9
The simple moving averagefor a particular number of days is i =
| !'1
the sum of most recentclosesfor that number of days divided
by thosedays.After the closeof trading,it is updatedto include
today's data and the data of the oldest day is dropped.This
figure is plotted on chartsto provide a smootherinterpretation
of the direction of prices. In the case of the 20-day simple
moving average,it is calculatedby adding the closing prices
of the last 20 days and dividing that total by 20. The 50-day
Sve is calculatedby adding the closing prices of the last 50
days and dividing that total by 50.
N,IOVING AVERAGE
ExpoNTxuAL
The calculation of the exponential moving average I S
less intuitive. It is calculated by taking a percentage of