Coppock Curves, sometimes called Coppock indicators or Trendex indicators, are a type of indicator which offers quant traders a solid foundation upon which to build a simple yet successful mechanical trading system.
As described in more detail below, I use Coppock Curves in my mechanical trading system to generate trading signals in the S&P 500 or any other highly-liquid index. Coppock Curves also work well for trading iShares and ETFs.
What is a Coppock Curve?
Coppock Curves are a momentum indicator. Over time, they oscillate over and under zero. The Coppock Curve indicator was first described in 1962 by the economist and trader Edwin Coppock. In fact, it works so well that the Market Technicians Association (MTA) recognized Dr. Coppock with a lifetime achievement award in 1989.
Its value lies in showing the beginning of long-term changes in price trends of stocks and indexes, particularly at the beginning of upward trends. This indicator can also signal the bottoms of futures and forex markets, yet I’ve found it less reliable there.
Although you can program your mechanical trading algorithms to generate trading signals based on this indicator over any time frame, I typically use it with monthly charts across a wide range of stock and index markets. Still, active traders can certainly use Coppock Curves with daily or even hourly time periods.
Specifically, I use Coppock Curves to generate “buy” signals at the bottom of bear markets. This indicator is especially good for distinguishing between bear rallies and actual market bottoms.
This is a trend-following indicator, so it doesn’t precisely show a market bottom. Instead, it shows me when a strong, bullish rally has become safely established enough to trade confidently.
Best of all, in my experience trades from signals based on Coppocks Curves are fairly resistant to shakeouts and whipsaws. Coppock Curves are slow, but they’re safe.
Coppock Curves signal the end of a “mourning period”
As background, it’s worthwhile to note that the original idea which led Dr. Coppock to develop his indicator was based on the natural cycle of life, death, and mourning before returning to new life again.
He thought that the normal upward march of stock markets (and therefore stock indexes) was like the “life” part of the cycle, which of course was followed by “death” that is, the period of falling prices during a bear market.
Dr. Coppock was particularly interested in calculating the length of a stock market’s “mourning” period, after which it would be safe to re-enter the market “long” again. Logically, this entry point at the end of the mourning period would represent the beginning of the next long-term uptrend.
The apocryphal story says that he asked the bishops at a local Episcopal Church, one of his investment clients, how long people usually spent in mourning after bereavements. He was told that human mourning typically requires between 11 to 14 months, so those were the values he adopted in his original equation to determine when stock prices would begin to rise again.
Coppock Curves were first used as long-term indicators based on monthly charts. Of course, the signals generated with monthly time frames are fairly infrequent. Still, because I use Coppock Curves to trade a variety of markets, I receive plenty of trading signals.
In particular, the monthly time frame is very reliable for stock and index trading. Studies have shown that, since 1920 in the U.S. stock markets, Coppock Curves have generated winning signals with about 80% frequency.
Nowadays, with the rapid turnover in modern markets, it seems that trading cycles have become faster. In addition to monthly time frames, some traders have found that daily time frames work very well in generating successful Coppock Curve signals.
A trader can program a mechanical trading system to recognize and respond to signals based on a daily or hourly time frame, although additional algo trading parameters should be added to reduce the chance of overtrading.
If you want to use Coppock Curves to generate signals on shorter time frames, you could experiment with your mechanical trading system using a variety of make-sense “mourning periods” for your particular marketplace.
How to calculate Coppock Curves
The Coppock indicator is based on three variables: A shorter-term rate of change (abbreviated as ROC), and a somewhat longer-term ROC. Coppock Curves are developed by using the weighted moving average (WMA) derived from the chosen time periods of a given market index.
The classic equation stated in words:
Coppock Curve = The 10-period WMA of a 14-period ROC plus an 11-period ROC
Or, as a formula for programming:
Coppock Curve = WMA of (ROC + ROC)
When ROC = [(Close – Close n periods ago) / (Close n periods ago)] * 100
Where n is the number of time periods.
In the classic scenario, 11 and 14 time periods. Be sure to make separate ROC calculations.
As you can see, the basic setup is very simple – On a moving basis, I program my mechanical trading system to calculate the percent of change in a given index (say the S&P or DJIA) from fourteen months ago.
Then, my mechanical trading program calculates the percentage change in the same index from eleven months ago. Next, the mechanical trading system adds together the two different percent changes. Then, it calculates a 10-period weighted moving average of the above total.
It’s important to note that you can use different time periods for the ROC calculations and the WMA calculations. I sometimes program my mechanical trading system to use the classic 11- and 14-month time periods for ROC while using time periods for the WMA which are shorter than the classic 10-month period.
So, I often use using a 2-month or 3-month WMA (instead of 10 months) while the ROC is calculated using the 11- and 14-month prices.
Or, you can modify your mechanical trading system to employ shorter time periods for some or all of the calculations, i.e. use daily or hourly prices instead of monthly price charts. It generates more signals, but in my experience they’re less reliable unless you add additional filters, as discussed below.
As well, you can add additional embellishments to suit your own needs. In any event, the general method remains the same. When charting the basic inputs, you’ll see that the output is a fairly smooth arc, hence the name of this indicator.
In any event, the classic Coppock Curve equation for programming a mechanical trading system can be stated as: The sum of the 14-month rate of change and the 11-month rate of change, with smoothing by applying a 10-month weighted moving average.
The Coppock Curve “buy” signal
On Coppock Curves, the zero line is the trigger. When the price line rises from below the 0 line it signals a low-risk buying opportunity. My mechanical trading system executes a buy when the Coppock indicator is first below 0, then heads upward from the trough.
Since this is most effective as a bullish indicator, I ignore the opposite (“sell”) signals. Still, some traders, especially those using short time frames, use Coppock Curves with algo trading systems to generate sell signals and execute trades that close out long positions. Active traders can both close long trades and open shorts when the Coppock Curve crosses below the zero line.
The figure below shows the classic Coppock Curve trading strategy using monthly time periods. The buy signal came in 1991. The sell signal came ten years later, in 2001. Note that this long time frame helped me avoid the slump in late 2001 and 2002.
The next buy signal came in 2003 and the sell signal was in 2008. This helped me escape the slump in 2008 and into 2009. Note, also that the current “buy” position, signaled in early 2010, continues to remain open, at least through the date of this chart.
Next, for more-active traders here’s a screenshot showing the strategy applied with shorter time periods, as shown on a daily S&P 500 chart. Of course, many more signals are generated, although in general they are less likely to be winners.
Importantly, the longer the time period, the safer the buy signal. Since my mechanical trading system based on Coppock indicators is a trend-following system, I don’t necessarily capture the immediate gains from the exact moment of a trend reversal. Instead, my mechanical trading system gets me “long” just before the beginning of a profitable advance in a bull market.
Adjusting and filtering signals from Coppock Curves
I’ve found Coppock Curves to be highly reliable when used for monthly time periods. In my experience, using weekly, daily or hourly time periods usually means that my entries and exits aren’t as “tight” as I would like, meaning that I don’t capture all the gains I had hoped for, and I also have more losses.
However, active traders can decrease the ROC variables, which has the effect of increasing the speed of fluctuation in Coppock Curves and will therefore generate more trading signals. Of course, even though monthly time periods are my favorite, an ultra-long-term trader could also increase the ROC time periods to slow fluctuations even more, thus generating fewer signals.
As I’ve said above, in order to receive earlier entry signals, I usually decrease the WMA downward from 10 months, sometimes to 6 months, and often to as little as 2 months. By programming my mechanical trading system carefully with just the right WMA period, and filtering the signals, I maximize my profitability in a given market.
If you want to use Coppock indicators for active trading, I recommend that you filter the trade signals generated by your mechanical trading system so that you only accept trades which are in the same direction as the current dominant trend. You’ll find this mechanical trading strategy to be the most profitable, since you can avoid many losing trades by filtering the signals.
Which markets show reliable Coppock Curves?
I use my Coppock curve-powered mechanical trading system to trade a range of indexes, especially those based directly on stocks, such as:
- Dow Jones Industrial Average
- S&P 500
- NASDAQ Composite
- EURO STOXX 50
- FTSE 100
- Nikkei 225
- Hang Seng
As well, if you’re focused on ETFs you’ll find that a mechanical trading system using Coppock Curves will allow you to catch the beginning of trends in specific market niches, such as biotechnology, energy, and international or regional equities niches.
The key is to make sure you trade only the liquid indexes. Otherwise, you may run the risk of being shaken out during “fake” trend changes.
Trading Coppock Curves in non-equity indexes
As well, for the sake of diversification and to avoid issues with correlation, I also program my mechanical trading system to spot and trade Coppock Curves in non-equity indexes as well. Again, I focus on markets which have sufficient liquidity.
There are some profitable non-equity indexes, including iShares and ETFs, which can be traded using Coppock indicators:
- Bloomberg US Treasury Bond Index
- Bloomberg Canada Sovereign Bond Index
- Bloomberg U.K. Sovereign Bond Index
- Bloomberg US Corporate Bond Index
- Bloomberg GBP Investment Grade European Corporate Bond Index
- Bloomberg EUR Investment Grade European Corporate Bond Index
- Bloomberg JPY Investment Grade Corporate Bond Index
- iShares Barclays 7-10 Year Treasury Bond Fund
- iShares Barclays 20 Year Treasury Bond Fund
- Schwab Short-Term U.S. Treasury ETF
- Vanguard Short-Term Government Bond ETF
- PIMCO 1-3 Year U.S. Treasury Index ETF
I’ve seen reliable signals from Coppock Curves when trading all the above-listed non-equity indexes. As always, the key is to use a mechanical trading system in only those markets which are highly liquid, so that the algorithms are reasonably sure that a confirmed signal is legitimate before trading it.
Coppock Curves show a straight line to success
In recent years, Coppock Curves have been drawing renewed interest from traders who are turning once again to this tried-and-true trading tool. See, for example, these recent mentions of Coppock indicators in the financial press: Jay On The Markets, and the follow up article, as well as in various trader musings.
In summary, I can say that Coppock Curves can lead you straight to success, as long as you have the patience to let your mechanical trading system do the work for you. If you use the length of variables’ time periods which are most appropriate for your chosen markets, you should do very well with Coppock Curves.