When Things Are Hot, Get In The Market – Enter HG

SPY TVO HG 5-6-15

We learned in a previous post that it is indeed possible to time the market using only volume with the TVO System. But what if you’re a more active swing trader looking for higher gains or just a little more excitement? Enter the Heat Gauge (HG). Here are 3 options trades showing how the Heat Gauge (using only volume data) called the major swings over a 2 month period in 2015.

1. On 3/10 things are heating up and the HG was at +82 (pretty hot for March), so on 3/11 we buy SPY 206 calls at the open for 2.47. By 3/18 things have cooled down a bit (-7 on the HG) and we sell our calls at the close for 5.59 (126% profit).

2. 3/25 we’re back up to our unseasonable warmth at +74. On the next day once again HG catches the very bottom of the swing (with only volume data from the night before), and we buy SPY 205 calls at 3.63. On 4/2 HG is -3 and we sell at 4.28 for a 17% gain.

3. The day of 4/17 (when talk of Armageddon was near) is a pretty warm one at +77. On 4/20 we buy SPY 210 calls and sell near the top of the swing a few days later for a 6% gain.

So how does it work and how did it come about?

It started as something sitting right in front of my face and I still couldn’t see it. Or maybe I just didn’t want to. In technical trading, this happens quite often, which is part of the reason I steered away from chart patterns and conventional indicators. But the “safer ” world of backtesting and quantitative strategies is not without its pitfalls.

One of the reasons I developed TVO (Total Volume Oscillator), was so that I could in effect remove myself from my trading. Having a proven system at the helm steering you through the markets, allows you more time for other stuff, like writing the TVO Market Barometer blog for instance, which I started a little over a year ago.

Right off the bat after the first few posts, several day traders started giving me accolades for “calling the market,” which was a bit surprising considering most of my comments were not meant to be trading signals. I did post signals for the longer term TVO system (and still do), but others were apparently managing to profit in the short-term from my market volume analysis.

I was somewhat intrigued. Then it hit me that maybe there was something there that I could use as a basis for a system to capture short-term swing moves. And of course it would have to be low maintenance to suit my recovering trade-o-holic status.

After crunching some numbers I came up with an algorithm that measures volume like a thermometer or Heat Gauge (Hg stands for mercury after all), and the concept of trading it are simple… When it gets hot, get in the market and when it cools down, get out or go short.

After several months and countless backtesting spreadsheets, the results came in and were astonishing to say the least. Here’s a chart of the initial equity curve. The return over a 15 year period was just over ten thousand percent. Comparing that to the S&P may seem silly, but just in case you’re curious, SPY is that almost straight red line at bottom of the chart.

Why does it work so well? You may not want to believe it, but in today’s market, volume is really the only leading indicator. It’s the big thing under everyone’s nose that many folks overlook or refuse to see. Everything else, including price and thus every indicator related to it, is often manipulated by Market Makers and Wall Street professionals and therefore should be suspect. Follow volume and you’ll stay one step ahead of the herd.

To see how HG performs as part of the TVO System, check out the complete backtesting results.

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

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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