# Using the Coppock Curve to Generate Trade Signals

The Coppock Curve (CC) was introduced by economist Edwin Coppock in an October 1962 issue of Barron's.﻿﻿ While useful, the indicator is not commonly discussed among traders and investors. Traditionally used to spot long-term trend changes in major stock indexes, traders can use the indicator for any time and in any market to isolate potential trend shifts and generate trade signals. (See also: An Introduction to Oscillators.)

## The Coppock Curve

Coppock initially developed the indicator for long-term monthly charts; this will appeal to long-term investors, as signals are quite infrequent on this timeframe. Drop down to a weekly, daily, or hourly time frame and the signals become progressively more abundant.

The indicator is derived by taking a weighted moving average of the rate-of-change (ROC) of a market index such as the S&P 500 or a trading equivalent such as the S&P 500 SPDR ETF. Simply put, it is a momentum indicator that oscillates above and below zero.

There are three variables within the indicator: The Short ROC Period and Long ROC Period are generally set at 11 and 14, respectively; the weighted moving average (WMA) is typically set at 10. The period indicates how many price bars are used in the indicator's calculation. Coppock preferred monthly price bars, but traders can use any size price bars, including 1-minute, hourly, daily, and so on.

Coppock came up with 11 and 14 periods for the ROC part of the calculation after being told by Episcopal bishops that the average person's mourning period is 11 to 14 months. Coppock inferred that a downtrend was like a mourning period, so he used these figures. The Coppock Curve is calculated as a 10-month WMA of the sum of the 14-month rate of change and the 11-month rate of change for the index.﻿﻿

For those mathematically inclined the formula is:

﻿ \begin{aligned} &\text{Coppock Curve} = ( WMA_{10} \times ROC_{14} ) + ROC_{11} \\ &\textbf{where:}\\ &ROC_n = 100 \times \frac { \text{CP} - \text{CP } n \text{ Periods Ago} }{ \text{CP } n \text{ Periods Ago} } \\ &\text{CP} = \text{Closing price} \\ &WMA_{10} = \text{The 10-period weighted moving average} \\ \end{aligned}﻿ ﻿

## Coppock Curve Strategy

The zero line of the Coppock Curve acts as a trade trigger; buy when the CC moves above zero, and sell when the CC moves below zero. Investors can use the sell signal to close out their long positions and then re-initiate long positions when CC crosses back above zero. Traders who wish to be more active can close out longs and initiate short trades when the CC crosses below zero.

Figure 1 shows the basic strategy applied to a monthly chart of the S&P 500 index. A buy signal was generated in 1991 followed by a sell signal in 2001. This would have allowed the investor to avoid much of the decline in the rest of 2001 and 2002. A buy signal was generated in 2003 with a signal to sell in 2008. The indicator would have again saved the investor from the rest of the decline in 2008 and early 2009. Another buy signal was generated in early 2010, and that position remains open until the CC moves below zero. (For more, see: Exploring Oscillators and Indicators.)

Figure 1. S&P 500 Monthly Chart with Coppock Curve

Source: Freestockcharts.com

In Figure 2, the strategy is applied to a daily chart of the S&P 500. Many more signals are generated, appealing to more active traders who wish to enter and exit on each price wave.

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

Source: Freestockcharts.com

While the typical indicator settings work well on monthly charts, they may not work as well on weekly or shorter timeframes. In Figure 2, for example, entries and exits occur a little too late in the move to extract much of a profit from the price waves and would result in losses on a number of trades.

Decreasing the rate-of-change variables will increase the speed of the fluctuations in the CC and increase the number of trade signals. Increasing the rate-of-change variable will slow the fluctuations and produce fewer signals.

If you wish to receive earlier entry and exit signals, decrease the WMA. The number of trade signals may increase with this adjustment also. To wait for more confirmation and receive later entry and exit signals, increase the WMA; this may also decrease the number of trade signals.

By decreasing the WMA to 6 (instead of 10), entries occur a bit earlier in the up moves, and exits (and potential short trades) occur a bit earlier in the down moves. In Figure 3, the vertical lines on the price portion of the chart reflect entries and exits based on typical settings (14,11,10) while the vertical lines on the Coppock Curve portion of the chart reflect entries and exits based on adjusted settings (14,11,6). The adjusted settings shift the entries and exits slightly to the left; such adjustments can have a large impact on profitability or losses.

The adjusted settings also created a new buy and sell signal in April 2014, which is not marked on the chart.

Figure 3. S&P 500 Daily Chart with Adjusted Coppock Curve Settings

Source: Freestockcharts.com

Active traders may wish to take trade signals only in the same direction as the dominant trend, as this is where most of the profits lie. On a longer-term chart, note the trending direction. If trading on a daily time frame, the longer-term chart would be weekly. If the Coppock Curve is above zero on the weekly, only take long trades on the daily chart. Sell when a sell signal occurs, but don't take short trades because this would be against the dominant trend.

If the dominant trend is down, take only short trades in a shorter time frame. Exit short positions when a buy signal occurs, but don't establish a long position, as this would be against the dominant downtrend.

Adjust the settings of the indicator on both time frames to create the number of trade signals you are comfortable with. (See also: Keep It Simple and Trade With the Trend.)

## Considerations

When the price is moving in a choppy fashion, especially on smaller timeframes, multiple signals can be generated resulting in numerous very short-term, and potentially unprofitable, trades. The indicator is best applied to trending markets, which is why establishing a dominant trend on a longer timeframe can help filter some potentially poor trades on lower time frames.

The strategy does not include a stop loss to cap the risk on each trade, but traders are encouraged to implement their own stop loss to avoid excessive risk. When initiating a long position, a stop can be placed below the recent swing low in price, and when initiating a short position, a stop can be placed above a recent swing high in price. (For more, see: The Stop-Loss Order - Make Sure You Use It.)

## The Bottom Line

The Coppock Curve is a momentum oscillator originally designed to point out shifts in the long-term trend of stock indexes. It does a good job of pointing out these trend changes on the monthly chart. Shorter-term traders can also use the indicator, and some adjustments to the settings may be required for these shorter time frames. Traders are encouraged to test out the strategy on their own markets and timeframes and make appropriate setting adjustments before implementing the strategy in the live market. (For additional reading, check out: Create Your Own Trading Strategies.)

Article Sources
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1. Defense Technical Information Center. "An Analysis of Stock Market Indicators," Page 9.

2. McClellan Financial Publications. "Calculating the Coppock Curve."