Coppock Curve Indicator Strategy (VIDEO, Trading Rules And Backtest)
Today we will look at a strategy that saw the day of light nearly 60 years ago. The somewhat cryptic name is the Coppock Curve. What is the Coppock Curve strategy about?
The Coppock Curve Strategy was devised by economist E.S.C. Coppock under a mandate from the Episcopal Church to find long-term investment opportunities. It’s also referred to as the Coppock Guide.
In this article, we examine its effectiveness – nearly 60 years after its introduction in 1965- and backtest the Coppock Curve.
What is the Coppock Curve Strategy?
The Coppock curve is a smoothed momentum indicator. It’s mainly used as a long-term indicator to determine significant market swings, primarily in the stock market.
It is calculated using a weighted moving average of two components. Coppock chose to use the Rate Of Change (ROC) indicator, which calculates the percentage change in the price. If you want to know more about ROC, you can continue reading our separate article about the ROC indicator:
What length did Coppock use for the two ROC values? Coppock obtained these values by investigating how long it took to recover from the pain of mourning the death of a loved one. From this study, he estimated the time to be between 11 to 14 months. And these values were subsequently used as the number of monthly bars on which Coppock calculated the moments.
Perhaps it sounds far-fetched, but please hang on until you read the backtest of the strategy.
Why should the Coppock Curve Strategy work?
The Coppock Curve strategy is a momentum indicator, a type of strategy that is a well-known and effective strategy mainly for stocks and stock indices. This is due to inflation and productivity gains that have made stocks rise about 10% annually for over a century. You can take advantage of the upward bias by using momentum.
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Coppock attempted to capture the market’s uptrends by filtering out the downtrends. To choose the parameters on which to set his indicator, Coppock compared the period to that of an individual’s recovery from mourning the death of a loved one. We might be skeptical of this comparison, of course, but we also know that markets are shaped by human nature.
Coppock Curve Strategy and time frame
The Coppock Curve Strategy has been designed as a long-term investment strategy. We use a monthly time frame. Because of this, the strategy has produced few trades in recent history. But nothing prevents you from being able to apply it on shorter time horizons, according to your own backtested research. There is no right or wrong in trading!
Coppock Curve Strategy trading rules
Formalizing the Coppock curve is very simple. The formula is:
CoppockCurve = WMA ( ROC ( Close, 11 ) + ROC ( Close, 14 ), 10 );
where WMA is a Weighted Moving Average of the sum of two rate-of-change indicators. In other words, the 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.
The values of 10 for WMA and 11 and 14 for the two ROCs are those originally proposed by Coppock.