The Total Volume Oscillator

I came across a trader’s tweet a while back. The S&P had dipped below the 200 day moving average, the bears were roaring and everyone else was running for the hills. It read something like,

If we don’t have a complete market crash in a week, then everything I know about stocks is wrong and I shouldn’t be trading.

Spoken like a true trade-o-holic… with words that I find all too familiar.

Well the crash didn’t happen (expect the unexpected), we went back to record highs, and that person’s avatar hasn’t been seen since. Unfortunately, I know how they must have felt because I have been there… far too many times. I wish I had a nickel for every time I’ve read some notable expert quoted as saying “in all my X years of trading, I’ve never seen anything like this before.”

So how do we keep up and make sense of a market that doesn’t seem to make sense? My search for a better way to cut through the bull, and ultimately rescue myself from the madness, has led me to create what I call TVO.

What is TVO?

TVO stands for Total Volume Oscillator. Through examining years of advance/decline volume data (going back to 1978), I came up with my own method of analyzing the ratio between the two. The result is an oscillator that indicates whether the market is overbought or oversold. Some folks might describe this kind of thing as a “breadth” indicator, but most of those that I’ve seen also incorporate price into the equation, where this one doesn’t.

How did you come up with the idea?

What are we missing to be so fooled by the market so many times? I had done so much in-depth analysis on price and trends, cross referencing every type of indicator, until I realized… maybe price is actually the problem. If prices are the reflection of investors perception of value, and that perception becomes distorted by countless factors (you know, things like elections, bank bailouts, etc.), then prices can often be misleading. So what’s left if price doesn’t matter?

The thing I hadn’t paid much attention to was volume. I’m not talking about the little bars at the bottom of all the charts (I found those can be misleading, too). When I started looking at the end-of-day overall market volume data, the true direction of prices became much more clear and easier to recognize. Then I thought, why not just ignore price entirely? That’s when my results got, well, interesting. In 2011, I started compiling my data in Excel and TVO was born.

So what are your results then?

Using the change in direction of daily Oscillator values as entry and exit points, I designed a long-short market timing system for the S&P 500 (SPY). The back-testing period is Jan 2000 through Sep 2014. This is what the equity curve looks like compared to Buy & Hold…

TVO System Equity Curve

In a 14 year period an initial $10,000 grew almost 300%, compared to the S&P which grew about 30% (Hmm so that’s like 10x better… maybe we’re on to something here). We know it was a rough ride for SPY, with the Dot-Com bubble bursting and the great recession, resulting in huge draw-downs, fire and brimstone and all of that… but what about TVO? Here’s a year by year breakdown of the returns:

TVO System Returns

The TVO System beat the Buy & Hold returns 11 out of 14 years, producing returns as high as 27% (in ’09). Overall, the average yearly return is around 10%. For those who bought the market in 2000, the yearly average was around 3%. The only yearly account loss for TVO was -6.68% (in ’08, of course), which was a fraction of the loss of Buy & Hold that year (-37%).

TVO overall produces a pretty smooth equity curve with consistently profitable returns using only volume data without any regard to price. There were 66 trades total with a success rate of 65%, which outperformed other systems I tested that had higher rates of 80-85%.

Wait, so how can 65% be better than 85%?

In most of the higher rate systems the average profit per trade is about the same as the losing profit (around 1%), so you need more winners to come out ahead. In the case of TVO, the average profit is around 2.5% (more than double)… so given the same amount of trades, the system with a larger average return per trade will make much more money.

So you actually do trade the TVO system?

Yes! I’ve been working with the data for some time, but I finally put it to use this year (2014) and so far the results have been consistent. I’ve found through using options (calls and puts), the returns get closer to 13% on average.

Using spreadsheets, I monitor daily market volume data, and watch for trade entry and exit signals. There are usually about 4 or 5 round trip trades generated per year, so you don’t have to sit and stare at a computer all day (unless you want to of course). The oscillator is also a handy gauge of overall market accumulation and distribution, which will help you to keep your head on straight while prices are going bonkers. It’s helped get my life back and hopefully it’ll do the same for you.

Sounds great! So I can I use it too?

It may not be the world’s best trading system (there are certainly many out there), but it’s easy to use and for a limited time,* I’m making the signals freely available. Just think of the fruit of my labor as a gift to all the pizzled (new word: pissed off and frazzled) investors and struggling traders out there. If I can save any of them (is it you?) from any amount of trade-o-holic misery, then my work was well worth it.

I’ll post the signals as they come in, and other interesting analysis as it happens all in real time. All you have to do is follow me on StockTwits and/or Twitter (@TradingLicks). And please continue to read my blog and leave a comment if you like. Oh and remember all of this is not to be considered professional investment advice (but you knew that already).

If you’d like to see the complete back-testing results of the TVO System and how it compares to Buy & Hold, shoot me an email at mike@mytradinglicks.com and I’ll send you a PDF of the complete report.

*UPDATE 2017… 

To follow our trades in real time and more, Subscribe to our options signals.

Since this post was published in 2014, The TVO System has grown to include 2 more indicators: The Heat Gauge (HG) and Issues Oscillator (IO). The complete options backtesting report (which generated almost a 2 million percent return over a 16 year period) is now available online. For complete details of all past trades, please view our Trade History.

Trades made with the TVO System are now verified by 2 independent websites: TimerTrac.com and Collective2.com. Performance data can be viewed there by clicking on the following medallion links.

 


Performance results on this website dated prior to September 2014 for TVO (prior to May 2015 for HG, and prior to May 2016 for IO), including backtesting and trade history, are simulated. Please read our full disclaimer.

2 thoughts on “The Total Volume Oscillator

  1. Thank you Mike for creating this blog explaining your research and philosophy. I and I imagine many many others have experiences similar to yours. Your devotion to utilizing a statistically proven system and to ignore the noise of opinions is an inspiration. A statistically proven system makes investing boring in a way but it works! Trading from the seat of your pants may be exciting but the losses pile up and that is more depressing than exciting. I am also a guitarist (just my hobby). My favorite guitarist is John McLaughlin.

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