TVO is ‘Price’-less Market Timing

SPY TVO 1st year trades

Can you use volume alone to time the market? Yes, actually you can. In 2014 we started trading SPY options using the TVO system (Total Volume Oscillator), and publicly posted each and every trade. No other price indicator or method was used (including my own gut) to time the entries and exits.

So how did we do? As of 11/13/15, a $50k investment made in Sep ’14 would have returned over 25% vs. the S&P 500 which gained 2% over the same time period. And these are real historical results, not backtesting. Here’s a table of the actual trades that were made:

TVO 50k P-L Sep14-Nov15

The position size/amount of contracts is 10% of total capital calculated at the entry date. Rather than use stops or target prices, we limit risk. The most you can ever lose in any given options trade is the premium paid for the contract. A loss of the entire premium would be a rare occurrence as the system makes sure the options are always closed well before expiration.

And since the gains on options are often as high as 50-200%, the reward can outweigh the risk quite substantially. Also, TVO is a long-term swing system generating only about 5-10 round trip trades per year, so the method is very easy to use and track.

Three of the above trades (10/16, 4/13 & 10/7) were 2nd entries where we added by doubling our position, except the last one where we added a 70% account position of SSO (2x leveraged SPY ETF). The system works well with ETFs in place of options, however, more capital is required (50% or more) to come close to the same kind of gains.

Trying to find just the right “live” day trading chat room service? You don’t have to. And less trades means you don’t even have to watch the market all day. There’s also more time for other stuff (Taking kids to the zoo, playing guitar, sky-diving, etc.), and less money in your broker’s wallet.

Can a more hands on trading approach return greater profits? Possibly. But low maintenance means lower stress, and I’m sure for some of you trade-o-holics out there, the trade-off (pun intended) is worth the peace of mind and better quality of life you’ll receive.

Let’s take a look at drawdown, which is frequently overlooked by system traders. No method works 100% of the time (TVO’s success rate is above 70% over a 15 year time period), so losses are inevitable. If your account level drops too far, the psychological aspect can raise doubts and may cause you to abandon your strategy altogether.

In the TVO system, drawdown is kept to a minimum and doesn’t last long, as the 5% account loss we had in June was quickly made up in the next trade. Currently our drawdown is back at zero.

So how about the return this year so far? From January until November 13th, TVO is still up more than 7% compared to the S&P which was down -2%. Here’s a graph of the equity curve from TimerTrac, a third party source we use to monitor our trading signals.


Since their service doesn’t have the feature to track strategies using options, the return displayed here is calculated using SPY (no leverage) in a full 100% position on each entry. Therefore the 2nd entry on 3 of the trades was omitted from the strategy.

The straight line in the middle is the period where we were in cash… From less than 2 weeks after the market top in May, until less than 2 weeks after the subsequent -10% market drop in August. Looks like TVO really does know exactly when to be in and out of the market!

How is all this possible without any regard to price or chart patterns? Big institutions move the market. When they decide it’s time to buy or sell, a surge or drop in volume literally lights up their trail. Fed meetings and other events can pump up prices to unrealistic highs and then shakeout the weak hands after devastating drops.

TVO ignores all of the noise and identifies the trend with one of the few stats that can’t be easily manipulated… Volume.  If you’re trying to find the real truth behind market moves, you needn’t look any further.

A “no price” concept in market timing may seem hard to fathom, but if another time-tested source is giving you valid entry and exit signals, then price just doesn’t matter… until it’s time to close your position.

The concept is simple… Big volume sets the trend. All you have to do is catch the wave.

And TVO is only half the story. In the next post we’ll check out the Heat Gauge (HG). -MD

For more on market volume, The TVO System, The Heat Gauge (HG), or how to trade options follow me on Twitter (@TradingLicks) and StockTwits!

Above post contains results from actual trades. Performance results on this website dated prior to September 2014 for TVO (prior to May 2015 for HG), including backtesting and trade history, are simulated. Please read our full disclaimer.

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