- March 22, 2021
- Posted by: CoachShane
- Category: Trading Article
Why does the Coppock Curve indicator use the settings of 11 and 14?
That, according to the developer Edwin Coppock, was the average mourning period in months for those who are grieving the loss of a loved one.
Coppock believed that the mourning period is roughly the same when people start looking for a recovery in the stock market.
The Coppock indicator was originally designed to show buying opportunities in the S&P 500 and the Dow. As time went on, traders began to adapt it to other markets, other techniques, and that’s what we are going to discuss.
Coppock Curve Formula
The CC indicator is a smoothed momentum indicator that traders are now using on any time frame as opposed to just the monthly chart. It is simply a weighted moving average of a Rate of Change indicator calculation.
Coppock Curve = 10-period Weighted Moving Average of (14-period Rate of Change + 11-period Rate of Change )
By using a weighted moving average, the most recent data is given more weight than prior data.
Can you change the default settings?
As with most indicators, you can change the settings to make them more or less sensitive. That’s not always a good use of your time as the combinations are endless.
Keeping the original settings of the Coppock Curve and then spending your time developing a strategy around it, is probably a better route for most traders.
A buy signal is triggered when the curve line breaks above the zero line.
A sell signal is triggered when the line breaks below the zero line.
For this example, we will use the monthly chart of Walmart and over the course of 8 years, we get 5 trading signals as shown by the vertical lines.
When the Coppock Curve goes green, it means we have crossed the zero line and is a buy signal.
Once we see red, it is time to exit your position and/or initiate a sell.
Perhaps a monthly chart is not the best for trading but you could use it for a macro view of the trend.
It’s Just An Indicator.
There is nothing overly special about the original time period so let’s look at a daily chart of Costco.
Quite a bit of action during these 12 months but overall and not including the current move, the results are not that impressive.
Remember though, we are just taking the crosses of the zero line as trading signals – when to buy and sell.
Generally, regardless of the trading indictor, trading a crossover is not generally the best approach.
Let’s try one last time on an intra-day time frame to see if the crossover of the zero line as a buy or sell signal is viable.
This is a 15 minute chart of MHK and remember, green we buy and red we sell.
Not impressive with a few false signals however this is just one snapshot in time. A further deep dive may be something you want to do but to save you time, it’s probably not going to yield great results.
Find The Trend
Another way you may consider using the Coppock Curve indicator is through a 2-stop process:
- Find the trend on the higher time frame
- Trade the zero line breaks on lower time frames.
What does that look like?
This is a 30 time frame of the stock of the same stock as earlier. This time, notice the small inset chart with is the daily time frame showing the indicator green – above zero.
This means on the lower time frame, we are only looking for trade signals that are buys.
Here is a general plan:
- The indictor crosses up from red to green
- A buy trade is entered on the close of the candle (time period)
- Traders can set an initial ATR stop loss (2-3 * ATR)
- Exits are when the Coppock crosses and closes below the zero line
We are using the power of the higher time frame trend along with the ebb and flow of price on the lower time frame.
Let’s Look At Using Weekly Charts For Trends And Daily Charts For Signals For Longer Term Traders.
If we zoom out and use the weekly trend and daily signals, does it do much better?
For this daily chart of MAA, I added in an ATR (average true range) for the stop loss and upon trade entry, will use the 2 X ATR to set initial stops. The weekly trend is up.
As you can see on the left side of the chart, there are all small losses. The ATR stop does help minimize the losses as at times it triggers before the cross.
There is one good section on the right that ran for about 11%.
Still, I would not risk my capital on the crosses of this indicator. Sure, you can play around with the inputs but as mentioned, it’s a rabbit hole.
Trend + Price
Let’s consider using the indicator for trend determination and simple bull flags or bear flags (essentially pullbacks) as an approach.
This is a daily chart of Euro Futures.
All we are using is simple chart patterns – flags, channels, ascending triangles, breakout/pullbacks, in the direction of the trend.
Now this is something I could get behind as a trader and it highlights why a technical indicator can’t replace price action entirely. There are some good trade entries here that are much better than what the crosses would give.
Think about these ideas:
- We can use it for a simple way to determine trend
- We can enter in the direction of the trend via patterns and exit via the change in trend by crossing zero
- We can use profit targets or trailing your stop under lows for longs or via an ATR reading
This is pretty close to naked trading where the only difference is using Coppock Curve indicator for trend.
The last technique I will look at is divergence. Since this is an oscillator and that is what is used for divergence, we can see how it performs in this manner.
This is the one hour chart of Euro Futures.
- Price is moving down while the indicator is red. As price makes lower lows, the indicator is making a higher low. Traders would start to consider an entry trigger which would occur in a down trend but with a risking Coppock Curve indicator
- Price makes a higher low while the indicator dips to red and puts in a lower low. While price does rally, it can’t make new highs. Price does go into a multi-day range
Using the indicator for divergence is another useful use of it. Traders looking to develop a trading strategy may consider higher time frame trends along with price patterns and divergence on lower time frames.
The idea behind the Coppock Curve is interesting but doesn’t really give an edge by itself.
As a trend indicator, it does what an indicator is supposed to do. You can use multiple time frames as a trading approach with the Coppock on a higher period for trend determination.
To give buy or sell signals, I would take a pass and rely on several chart patterns. You could add another technical indicator but if you do, just make sure it is not redundant. You don’t need to use two oscillators.
Consider experimenting with a moving average for trend and the Coppock Curve for trading triggers. I didn’t cover that but it is something to experiment with.
Experiment with divergence and trend direction. While I did not do an exhaustive test, that approach may have merit.
My pick for the bones of a trading strategy would be to use price patterns along with trend determination and divergence.
As always, proper risk protocols must be in place before placing any trades.