A Color-Based System For Short-Term Trading by Edgar Kraut
Using the Spdr S&P 500 exchange traded fund as an example, here’s how you can apply a simple swing trading system that utilizes the colors of volume bars.
Most technical traders use some combination of price-based indicators to support their trading decisions. Here’s a very simple swing trading system based on coloring volume bars. It can be used either as a standalone trading system or in conjunction with other trading systems. This is how it works:
If today’s closing price and volume are greater than two weeks ago, color today’s volume bar green.
If today’s closing price is greater than two weeks ago but volume is not, color today’s volume bar blue.
Similarly, if today’s closing price and volume is less than two weeks ago, color today’s volume bar orange.
If today’s closing price is less than two weeks ago but volume is not, color today’s volume bar red.
It’s a very simple color-based trading system that takes only long positions and works as follows:
Buy the green or blue volume bars, use a 1% trailing stop, and stand aside on red or orange bars.
HOW WELL DOES THIS WORK?
With an initial investment of $10,000 on April 17, 2002, and trading the Spdr S&P 500 exchange traded fund (Spy), this simple mechanical trading system grew to $22,143 as of one year later (April 17, 2003). These numbers do not include commissions or slippage. This is a 121.43% gain compared to a buy & hold loss of ‑20.59% or ‑$2,059. I will show you how to construct this trading system in MetaStock (end of day) and how the system can be implemented as an Excel spreadsheet.