Last Updated on 14 March, 2021 by Samuelsson
There are hundreds, if not thousands, of indicators created by traders to help them analyze price movements in real-time, and the Coppock Curve is one of the very useful ones. But what exactly is Coppock Curve, and how is it calculated?
Coppock Curve is a momentum indicator developed by Edwin Sedge Coppock in 1962 for identifying long-term buying opportunities in a stock or equity market index. The indicator is designed to spot major downturns and upturns in security, which present long-term buying opportunities or signal a time to get out of the market, as the case may be.
Surely, you will want to know more about this indicator, so read on! In this post, you will learn the following:
- What the Coppock Curve is
- The way it is calculated
- How to interpret the signals
- How to use it in your trading along with other indicators
Understanding the Coppock Curve: what is it?
Introduced by economist Edwin Coppock in an October 1962 issue of Barron’s Magazine, the Coppock Curve indicator is a momentum indicator designed to identify major upturns and downturns in the markets. It was initially developed for monthly charts as it was intended to be a long-term forecasting tool to generate buy signals for position trading. While it appeals to investors and position traders, it wasn’t of much use to swing traders and day traders. However, you may still attach it to weekly, daily, or intraday charts for shorter-term signals.
Also known as the Coppock Guide, Coppock Curve is derived by taking a weighted moving average of the rate-of-change (ROC) of a stock or a stock market index such as the S&P 500 or an exchange-traded fund (like the S&P 500 SPDR ETF). Functionally, the indicator is trend following because it gives long-term signals, but structurally, it is a momentum oscillator that oscillates above and below zero. Since it was initially designed to pick trending stocks and stock indices, it generates only buy signals.
The signal is very simple though. It uses monthly data to identify buying opportunities when the indicator moved from negative territory to positive territory — crossing from below the zero levels to above it.
How is the Coppock Curve calculated?
The Coppock Curve is calculated as a 10-month weighted moving average of the sum of the 14-month rate of change and the 11-month rate of change.
Coppock Curve formula
The formula is given as follows:
Coppock Curve = WMA10 of (ROC14 + ROC11)
WMA10 = 10-period weighted moving average
ROC14 = 14-period rate of change
ROC11 = 11-period rate of change
In technical analysis, the rate of change is the difference between the closing price today and the closing price some X periods ago, and then, dividing that figure by the closing price X periods ago:
Rate of change = [Closing Price (today) – Closing Price (X periods ago)] / Closing Price (X periods ago)
Calculating the Coppock Curve
With the above formulas, these are the steps to follow when calculating the Coppock Curve:
- Use monthly data (most recent monthly closing price and that of 14 months ago) to calculate ROC14.
- Also, use monthly data (most recent monthly closing price and that of 11 months ago) to calculate ROC11.
- Add ROC14 to ROC11 — do this each period going forward.
- Once you get up to 10-periods of the sum of ROC14 and ROC11, take a weighted moving average of the 10 values. Keep doing this for the most recent 10 periods, with each period going forward.
Note that the choice of 11-month and 14-month periods for the rate of change calculations is arbitrary. The creator of the indicator chose them because he believed that bear markets were psychologically similar to periods of mourning, which, according to religious figures he trusted, could take between 11 and 14 months. You may tweak with other periods to see what you can get.
Interpreting the Coppock Curve signals
The Coppock Curve indicator is made to be a useful tool for long-term stock investors and position traders. As an oscillator, the indicator stays in the indicator box of the chart; it consists of a single line moving above and below a centerline positioned at 0.00. While it was originally designed for the monthly chart (candlestick or bar chart), you can also use it on the lower timeframes, including the weekly, daily, and intraday timeframes.
Generally, when the indicator stays above the zero level, it indicates a hold; when it falls below the zero level, it indicates a sell; and when it climbs above the zero level, it signals a buy. It is just that simple, but beyond those signals, the indicator doesn’t often correlate to price because of its long-term lagging nature.
Please note that a sell signal doesn’t necessarily mean you should go short on a stock; it is an indication to close an already existing long position if it hasn’t been closed at your profit target. Only experienced traders who have a margin account can go short on a stock because it is basically like borrowing the stock from the broker to sell, with the hope of buying them back at a lower price. Since stocks have unlimited upward potential, we don’t advise inexperienced traders to attempt short positions.
How to use the Coppock Curve in your trading
There are many ways you can make use of this indicator in your trading. You can either trade it alone, especially if you are a long-term position trader, or use it in combination with other technical indicators.
Trading the Coppock Curve indicator alone
Long-term position traders and investors can use the Coppock Curve indicator to identify market upturns and downturns, which may have long-term momentum behind them. However, you can still use the indicator if you are a short-term trader (a swing trader or even an intraday trader).
The best way to trade with the Coppock Curve indicator alone is to use the multi-timeframe analysis approach. With this method, you use the indicator to identify a potential long-term bullish momentum in a longer timeframe and, then, step down to a lower timeframe to pick buying signals. For example, if you are a swing trader, you may identify an uptrend (the Coppock Curve is above zero) in the weekly timeframe and step down to the daily or 4-hourly timeframe to take only long trades whenever the indicator crosses above the zero level. Take a look at the charts below:
Coppock Curve stayed above zero during the period indicated by the two blue lines
Potential trades indicated by green arrows
Trading the Coppock Curve with other Indicators
It is easy to combine the Coppock Curve with any other indicator. You can use another indicator to identify a trend and use the Coppock Curve as a trigger to enter a trade since it is a momentum oscillator. Alternatively, you can use the Coppock Curve to spot a potential trade and use another indicator as a trigger to enter the trade.
Trading Coppock Curve with a long-period moving average
For this method, you can use a 200-day moving average to identify the overall direction of the trend, while you use the Coppock Curve to find a suitable entry. You would want to take only long trades, so your interest should be in up-trending stocks. Here is your entry criteria:
- The 200-day moving average is sloping upward
- The price pulls back toward the moving average line and turns back upward
- The Coppock Curve crosses above the zero level
Trading Coppock Curve with RSI(2)
Here, you use the Coppock Curve to identify potential bullish momentum in the market and then use a 2-period RSI to spot the right entry. This is a mean-reversion kind of trade, so it is usually quick in and quick out — a trade may last only a day or two. You exit once the RSI crosses 60.
Your entry criteria is as follows:
- The Coppock Curve rises and stays above the zero level
- The 2-period RSI falls below 10
The drawbacks of the Coppock Curve
As with every trading indicator, the Coppock Curve has some inherent limitations, which you should know. Here are some of them:
- False signals: One of the major drawbacks of the Coppock Curve is that it can give a false signal, but this is very common with all technical indicators. False signals can occur when the market is in a range, making the indicator to move above and below the zero level frequently. As a result, traders may place buy orders on seeing a buy signal, but then the indicator crosses down in no time, indicating a sell signal.
- Lagging: The indicator lags a lot because it is based on moving averages and covers long periods in its calculation. With its default settings, the indicator uses 10-month, 11-month, and 14-month averages, so it will lag in spotting major market bottoms and tops.
- Curve fitting: Another major limitation of the indicator is that the settings are arbitrary, so the trader can choose any setting that suits him/her. While the flexibility may seem good, it can lead to curve fitting, a situation where the trader adjusts the settings to perfectly fit historical price data. Fitting the indicator to provide the best historical signals may make the indicator useless when applied to real-time price action.