CVI- and CVT: Additional Components of CVI
In this article I will introduce the CVI- and the CVT which are combined with the CVI+ to create the “CVI” which is the composite indicator.The purpose of using the various indicators described is to further clarify the different contingent setups that can exist in security prices that are not differentiated when using indicators such as RSI2 or DV2. Understanding the conceptual and empirical relationship between these setups and countertrend/trend indicators is vital to improving performance. CVI- is used to identify downside breakouts , which is the same concpet as the CVI+: requiring low volatility but a downside breakout from the consolidation range. CVT is essentially a short term trend indicator which indicates the “goodness of fit” of recent prices. The purpose of the CVT is to determine how pronounced a move is on the upside or the downside. I have held off on the results on the CVI because it is important to understand what goes into the indicator. I found that the CVI is capable of telling you when short-term, intermediate-term, and long-term moving averages are likely to function as trend indicators or as countertrend indicators. In addition, it works even better on daily follow-through MR, short-term oscillators or mean-reversion indicators. The performance difference is truly remarkable.
All of the indicators- CVI+, CVI-, and CVT are very useful for traders in their own right. They provide information that doesn’t get captured by any one indicator, and in the case of CVT – it provides information not contained in standard indicators. The value of creating composite breakout indicators is that they are normalized and simplified which makes parameter testing and sensitivity much less of an issue. I have had commentary sent to me by traders asking why I bothered separating the two as I could have easily combined them into one breakout indicator. The simple answer is that using each in isolation produces superior results, and also they provide incremental information. For example, what is the reverse of a CVI+? It is clearly NOT the CVI-, in fact the reverse of CVI+ represents a volatile 10-day range followed by a breakown which makes it a separate contingency worth exploring. Using them in tandem or separately can form the basis of excellent systems.