# Using the Coppock Curve to Generate Trade Signals

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Edwin Coppockin, an economist, introduced the Coppock Curve (CC) in the October 1962 edition of Barron’s. Despite its utility, the indicator is seldom mentioned among traders and investors. Traditionally used to detect long-term trend changes in major stock indexes, traders may now use the indicator to pinpoint prospective trend shifts and provide trade signals at any time and in any market. (An Introduction to Oscillators is also available.)

## The Coppock Curve

Coppockinitially devised the indicator for long-term monthly charts; this will appeal to long-term investors since alerts on this period are relatively scarce. When the time period is reduced to a weekly, daily, or hourly basis, the signals become more plentiful.

The indicator is calculated by taking a weighted moving average of the rate-of-change (ROC) of a market index like the S&P 500 or a trading counterpart like the S&P 500 SPDRETF. Simply described, it is a gauge of momentum that oscillates above and below zero.

The indicator has three variables: The Short ROC Period is often set at 11 and the Long ROC Period is typically set at 14; the weighted moving average (WMA) is typically set at 10. The period specifies the number of price bars utilized in the indicator’s computation. Coppock liked monthly price bars, although traders may use whatever size price bar they choose, such as 1-minute, hourly, or daily.

Coppock arrived at 11 and 14 months for the ROC portion of the equation after hearing from Episcopal bishops that the typical person’s grieving time is 11 to 14 months. Coppockin reasoned that a downturn was similar to a time of sorrow, thus he utilized these data. The Coppock Curve is derived as a 10-month WMA of the sum of the index’s 14-month and 11-month rates of change.

For those mathematically inclined the formula is:

CoppockCurve = ( W M A 1 0 R O C 1 4 ) + R O C 1 1 where: R O C n = 1 0 0 CP CP n PeriodsAgo CP = Closingprice W M A 1 0 = The10-periodweightedmovingaverage beginaligned &textCoppock Curve = (WMA 10 multiplied by ROC 14) + ROC 11 &textbfwhere: &ROC n = 100 times frac frac textCP – textCP n text Periods Ago &textCP = textClosing price &WMA 10 = textThe 10-period weighted moving average &WMA 10 = textThe 10-period weighted moving average endaligned â€‹â€‹

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The CoppockCurve is only one of several technical indicators that may help you make trading choices. To learn more, check out the Investopedia Academy’s Technical Analysis course, which contains videos and real-world examples to help you improve your trading abilities.

## Coppock Curve Strategy

The CoppockCurve’s zero line serves as a trading trigger; buy when the CC travels above zero, and sell when the CC moves below zero. Investors may utilize the sell signal to exit long bets and then re-enter long ones when the CC crosses above zero. Traders who want to be more active might exit long positions and enter short positions when the CC falls below zero.

Figure 1 depicts the fundamental technique on a monthly chart of the S&P 500 index. In 1991, a purchase signal was created, followed by a sell signal in 2001. This would have enabled the investor to escape the majority of the fall in 2001 and 2002. In 2003, a purchase signal was created, followed by a sell signal in 2008. The indication would have rescued the investor from the remainder of the 2008 and early 2009 downturn. In early 2010, another buy signal was created, and that trade is still open until the CC falls below zero. (See also: Exploring Oscillators and Indicators.)

Figure 1. S&P 500 Monthly Chart withCoppockCurve

Source: Freestockcharts.com

Figure 2 shows the method applied to a daily chart of the S&P 500. Many more signals are created, enticing more aggressive traders who want to join and exit at the top and bottom of each price wave.

Figure 2. S&P 500 Daily Chart with Coppock Curve Signals

Source: Freestockcharts.com

While standard indicator settings perform well on monthly charts, they may not perform as well on weekly or shorter timescales. For example, in Figure 2, entrances and exits come a bit too late in the move to extract any profit from the price waves, resulting in losses on a lot of transactions.

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Reduce the rate-of-change variables to enhance the pace of the CC fluctuations and the quantity of trade signals. By increasing the rate-of-change variable, the fluctuations will be slower and there will be fewer alerts.

Reduce the WMA if you want to get earlier entrance and exit signals. This change may also enhance the quantity of trading signals. Increase the WMA to get more confirmation and obtain later entry and exit signals; this may reduce the amount of trade signals.

By lowering the WMA to 6 (rather than 10), entry occur sooner in up movements and exits (and possible short trades) occur earlier in down swings. In Figure 3, the vertical lines on the price section of the chart indicate usual settings (14,11,10), but the vertical lines on the Coppock Curve portion of the chart show altered parameters (14,11,6).The modified parameters move the entry and exits to the left somewhat; such changes may have a significant influence on profitability or losses.

The updated settings also generated a fresh buy and sell signal in April 2014, which is not shown on the chart.

Figure 3: S&P 500 Daily Chart with Coppock Curve Adjustments

Source: Freestockcharts.com

Active traders may choose to just accept trade signals in the same direction as the dominating trend, since this is where the majority of the profits are. Take notice of the trending direction on a longer-term chart. The weekly chart would be used if trading on a daily time period. Only take long trades on the daily chart if the Coppock Curve is above zero on the weekly chart. Sell when a sell signal appears, but don’t go short since this would be going against the overwhelming trend.

Take only short trades in a shorter time period if the dominating trend is down. When a purchase signal appears, exit short positions but do not create a long position since this would go against the dominating downtrend.

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Adjust the indicator parameters on both time periods to generate the quantity of trade signals that you are comfortable with. (For further information, see Keep It Simple and Trade With the Trend.)

## Considerations

When the market moves choppy, particularly on smaller timeframes, several signals may be created, resulting in a slew of extremely short-term, possibly costly transactions. Because the indicator works best in moving markets, establishing a dominating trend on a longer period may help filter out possibly bad bets on shorter time frames.

The technique does not contain a stop loss to limit the risk on each trade, but traders are advised to use their own stop loss to prevent taking on too much risk. A stop may be set below the recent swing low in price when starting a long position, and a stop can be placed above the recent swing high in price when starting a short position. (For further information, see The Stop-Loss Order: Use It.)

## The Bottom Line

The Coppock Curve is a momentum oscillator that was developed to detect changes in the long-term trend of stock indexes. It does an excellent job of highlighting these trend shifts on the monthly chart. Shorter-term traders may also utilize the indicator, however some modifications to the parameters may be necessary. Before executing the technique in the live market, traders are recommended to test the method on their own markets and timeframes and make relevant setting modifications. (For further information, see Create Your Own Trading Strategies.)

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