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.
- S&P 500 Momentum Strategy – As Simple As It Gets (Backtested)
- Momentum Trading Strategy (How To Trade It – Backtest)
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.
The values of 10 for WMA and 11 and 14 for the two ROCs are those originally proposed by Coppock.
If you want to know more about the WMA, please read our old article:
The signals are thought to trigger a long entry trade when the Coppock curve crosses above the zero line and trigger an exit when the curve crosses below the zero line (from the upside).
Coppock Curve Strategy example
Let’s show you some examples of two trades. In the chart below, you can see both the entries and the exits:
The example comes from applying the Coppock curve to a monthly chart of the S&P 500 index.
You bought on the close of 01/29/2010, and you exit at the close on 02/29/0216. The trade lasted 6 years and one month for a profit of about 80% (1073.87 to 1932.23). The second trade started on 07/29/2016 at 2173.6 and ended on 09/30/2022 at 3585.62 for a profit of about 65% in 6 years and two months.
Coppock Curve Strategy backtest – does it work?
Let’s backtest the Coppock Curve strategy. We backtest the cash index of S&P 500 from 1960 until today. The trading rules are those stated above, and the chart below shows the equity curve with a start of 100 000 and compounding the profits. Dividends are not included in the simulation; thus, the results are somewhat understated.
Below are all trades since 1960 listed:
There are very few trades: only 12 trades over 63 years, but remember that this is a monthly time frame, and thus you must expect a much lower number of trades compared to a daily time frame.
Let’s take a look at the equity chart:
The trading statistics and metrics read like this:
- 12 trades since 1960
- Annual Return: 6.11% (buy and hold is 7.03%) – not including dividends
- The average gain per trade is 45.06%
- 100% of the trades are winners
- You are invested 73.75% of the time
- Max drawdown is 30.16% (buy and hold 52.56%)
- Risk-adjusted return is 8.29% (6.11% divided by 0. 7375) (buy and hold 7.03%)
What stands out is the substantial drawdown reduction; we know how difficult it is for a trader to deal with losses without folding.
Furthermore, you are in the market for about a quarter less time. And we also know that the less you are in the market, the less risk you are exposed to.
The trades are all winners, but this aspect is of little significance given the small number of trades.
Finally, the risk-adjusted return exceeds that of the buy & hold, so we might argue the Coppock Curve strategy performs better than a simple Buy & Hold strategy.
Finally, we list the annual returns:
The Coppock curve strategy – conclusions:
The Coppock curve strategy was conceived about 60 years ago. However, still, today, it maintains its validity in trying to exploit the bullish bias of the markets by filtering the corrective phases.
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