# Technical Analysis from A to Z

by Steven B. Achelis

FOUR PERCENT MODEL

Overview

The Four Percent Model is a stock market timing tool based on the percent change of the weekly close of the (geometric) Value Line Composite Index. It is a trend following tool designed to keep you in the market during major up moves and out (or short) during major down moves.

The Four Percent Model was developed by Ned Davis and popularized in Martin Zweig's book Winning on Wall Street.

Interpretation

A significant strength of the Four Percent Model is its simplicity. The Model is easy to calculate and to analyze. In fact, only one piece of data is required--the weekly close of the Value Line Composite Index.

A buy signal is generated when the index rises at least four percent from a previous value. A sell signal is generated when the index falls at least four percent. For example, a buy signal would be generated if the weekly close of the Value Line rose from 200 to 208 (a four percent rise). If the index subsequently rallied to 250 and then dropped below 240 (a four percent drop), a sell signal would be generated.

From 1961 to 1992, a buy and hold approach on the Value Line Index would have yielded 149 points (3% annual return). Using the Four Percent Model (including shorts) during the same period would have yielded 584 points (13.6% annual return). Interestingly, about half of the signals generated were wrong. However, the average gain was much larger than the average loss--an excellent example of the stock market maxim "cut your losses short and let your profits run."

Example

The following chart shows the Zig Zag indicator plotted on top of the Value Line Composite Index.

The Zig Zag indicator identifies changes in price that are at least 4%.

*Technical Analysis from A to Z*is reproduced here with permission from the author and publisher.

### Contents

- Preface
- Acknowledgments
- Terminology
- To Learn More
- Bibliography
- About the Author
- Technical Analysis
- Price Fields
- Charts
- Support & Resistance
- Trends
- Moving Averages
- Indicators
- Market Indicators
- Line Studies
- Periodicity
- The Time Element
- Conclusion
- Absolute Breadth Index
- Accumulation/Distribution
- Accumulation Swing Index
- Advance/Decline Line
- Advance/Decline Ratio
- Advancing-Declining Issues
- Advancing, Declining, Unchanged Volume
- Andrews' Pitchfork
- Arms Index
- Average True Range
- Bollinger Bands
- Breadth Thrust
- Bull/Bear Ratio
- Candlesticks - Japanese
- CANSLIM
- Chaikin Oscillator
- Commodity Channel Index
- Commodity Selection Index
- Correlation Analysis
- Cumulative Volume Index
- Cycles
- Demand Index
- Detrended Price Oscillator
- Directional Movement
- Dow Theory
- Ease of Movement
- Efficient Market Theory
- Elliott Wave Theory
- Envelopes (Trading Bands)
- Equivolume/Candlevolume
- Fibonacci Studies
- Four Percent Model
- Fourier Transform
- Fundamental Analysis
- Gann Angles
- Herrick Payoff Index
- Interest Rates
- Kagi
- Large Block Ratio
- Linear Regression Lines
- MACD
- Mass Index
- McClellan Oscillator
- McClellan Summation Index
- Median Price
- Member Short Ratio
- Momentum
- Money Flow Index
- Moving Averages
- Negative Volume Index
- New Highs-Lows Cumulative
- New Highs-New Lows
- New Highs/Lows Ratio
- Odd Lot Balance Index
- Odd Lot Purchases/Sales
- Odd Lot Short Ratio
- On Balance Volume
- Open Interest
- Open-10 TRIN
- Option Analysis
- Overbought/Oversold
- Parabolic SAR
- Patterns
- Percent Retracement
- Performance
- Point & Figure
- Positive Volume Index
- Price and Volume Trend
- Price Oscillator
- Price Rate-of-Change
- Public Short Ratio
- Puts/Calls Ratio
- Quadrant Lines
- Relative Strength, Comparative
- Relative Strength Index
- Renko
- Speed Resistance Lines
- Spreads
- Standard Deviation
- STIX
- Stochastic Oscillator
- Swing Index
- Three Line Break
- Time Series Forcast
- Tirone Levels
- Total Short Ratio
- Trade Volume Index
- Trendlines
- TRIX
- Typical Price
- Ultimate Oscillator
- Upside/Downside Ratio
- Upside/Downside Volume
- Vertical Horizonal Filter
- Volatility, Chaikin's
- Volume
- Volume Oscillator
- Volume Rate-of-Change
- Weighted Close
- Williams' Accumulation/Distribution
- Williams' %R
- Zig Zag