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I've
had some luck coding this type of system in Excel. Due to the fact that
you cannot enter trades at anything other than open or close, I've found this is
the only way to do it. Unfortunately I also had to learn Excel at the same
time. My problem is finding the best exit system to apply. I've
found that most would max out at an average 8-10% profit. Stop and
reverse seems to work minimally well. My next try will be the ATR Ratchet as
spelled out by The Traders Club.
<FONT face=Tahoma
size=2>-----Original Message-----From:
owner-metastock@xxxxxxxxxxxxx [mailto:owner-metastock@xxxxxxxxxxxxx]On
Behalf Of Gen & HerveSent: Friday, September 07, 2001 4:38
PMTo: metastock@xxxxxxxxxxxxxSubject: Re: Larry
Williams' "Volatility Breakout System"
The code is rather easy to write but you should first answer
the few questions equis was asking as they are very relevant. you also need to
decide on the filter (ADX or CCI?) as Equis, in their answer only consider the
ADX. Also with Metastock you won't be able to enter at the exact price
therefore you have to decide if you want to enter at the open, close, high or
low of either the signal day (or bar) or the next one.
Herve
<BLOCKQUOTE
style="PADDING-LEFT: 5px; MARGIN-LEFT: 5px; BORDER-LEFT: #000000 2px solid; MARGIN-RIGHT: 0px">
-----Original Message-----From:
Nick Channon <<A
href="mailto:nick.channon@xxxxxxxxxxxxx";>nick.channon@xxxxxxxxxxxxx>To:
metastock@xxxxxxxxxxxxx
<<A
href="mailto:metastock@xxxxxxxxxxxxx";>metastock@xxxxxxxxxxxxx>Date:
Saturday, 8 September 2001 12:11Subject: Larry Williams'
"Volatility Breakout System"
Hi,
I'm writing to ask for assistance from any of you guru
code-writers out there.
I wrote to Equis support to ask if they could provide me
with the necessary formulas for Larry Williams' "Volatility Breakout
System". I provided them with a description which I found on the web
(reproduced below). Equis wrote back with the message below. What I need to
know is:
1) Have Equis come up with accurate English-language
descriptions? (Any Williams experts out there? I do not have the knowledge
to judge the accuracy.)
2) Can anyone save me $60 and benefit other group members
also by taking up the challenge to code relevant explorations, indicators,
experts etc.?
There follows the description found on the web, and the
reply from Equis.
Cheers
Nick
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DESCRIPTION FOUND ON WEB
As far as we are aware, the early groundwork for volatility-based
tradingsystems was laid by Larry Williams in the early 1970's. He sold
at leastthree systems based on the same technique, each at successively
higherprices (one of them was called the Million Dollar System). Welles
Wilder, inhis 1978 book New Concepts in Technical Trading Systems,
reiterated theessential principles, as did Perry Kaufman in Commodity
Trading Systems andMethods.After Williams a number of vendors
sold systems based on the method, thebest known of which is probably the
Volatility Breakout System offered byDoug Bry of Lakewood, Colorado.
Anyone who is interested in reproducingand/or testing any of these
volatility based systems should be aware of avery reasonably priced
software package, Steve Notis' Trader’s Powerkit,that incorporates most,
if not all, of the trading logic of the systems thatsold for many
thousands of dollars.The Basics - Measuring VolatilityThe
volatility-based trading systems all use the concept of range to
definethe extent of recent market movement. The simplest definition of
range isthe distance from high to low of any given time period. This is
usually aday, but it could be a week or a month or even an intraday
period measuredin minutes.This simple definition of range works
fine most of the time, but it doesn'ttake into account days of extreme
price movement. Limit days, for example,may have a very narrow range,
but the market is obviously very volatile andvolatility is increasing.
Similarly, a day when there is a gap opening andthe day's trading takes
place outside the prior day's range is an example ofincreasing
volatility, even if the actual range of the day is lessthan that of the
prior day.Wilder recognized this problem and defined the True Range
(TR) as thegreatest of the
following: 1.
The distance from today's high to today's
low. 2. The
distance from yesterday's close to today's
high. 3. The
distance from yesterday's close to today's low.By itself, the True
Range is still just an isolated number. To make itmeaningful, we must
take a number of past days and find the mean, giving usan Average True
Range (ATR). This is a direct measurement of marketvolatility. If the
ATR is increasing, the market is becoming more volatile.If the ATR is
decreasing, the market is becoming less volatile.How many days to use to
produce the "best" ATR is a matter of conjecture.Wilder's original
volatility formula (to be explained later) uses 14 days,but most of the
modern system sellers have optimized this variable and foundthat
anywhere from 2 to 9 days was better. The most profitable (as measuredby
Futures Truth) of these systems, the Volatility Breakout System,
normallyuses only two days.How the Volatility Systems
WorkAll of the popular volatility-based trading systems work on the
principlethat a breakout or price spike outside of the recent Range or
Average TrueRange is significant and should be used as a point at which
to enter themarket. For example, let us say that the ATR for the last
five days in theNYSE Composite futures is 1.00 points. We would be
interested in a pricemove that is a percentage, say 150%, of the ATR
from the prior day's close.This means that we would be buying or selling
if prices moved 150% x 1.00,or 1.50 points. If the prior day's close was
190.00, we would buy at 191.50or sell short at 188.50.The two
variables of the system
are: 1) the number of days
used to find the ATR 2) the
percent move from the prior day's close that constitutes avalid
breakout.Most of the system vendors and the presently available
software rely onoptimization to decide which values to be used for each
variable.As you may have deduced, the basic volatility breakout
system is a reversalsystem that is always in the market. Each day after
the close, calculate theATR, and then multiply it by the percent move
necessary to trigger a trade.Add the result to the close, and you will
get the point at which a buy willbe triggered the next day. Subtract the
result from the close, and you willget the point at which a sell will be
triggered. Enter both orders the nextday and you are in
business.Comments and VariationsOne of the significant
strategies of the basic system is that since you areeither long or
short, there is no neutral area. The risk on any one trade issimply the
difference between the entry point and the reversal point. Ifthey are
both triggered on the same day or very close in time to oneanother, a
whipsaw is the obvious result. Perhaps more importantly, the risk on a
trade depends entirely onrecent market volatility, which may or may not
agree with a trader's walletsize or money management techniques.
However, the market does not care aboutconforming to your money
management techniques. If you can not tolerate thehistorical
volatility and potential drawdown of a certain stock or futuresmarket,
then you should trade smaller lots or mini-contracts.Good trading
systems are designed first to make money, and then, onlysecondly, to
make the process as comfortable as possible by smoothing outpotential
drawdowns. These two goals are always at odds. Less risk
(e.g.tighter stops) always produces less profit. There is a limit
to howcomfortable you can make a system and still show a
profit.Another interesting aspect of volatility systems is that the
entry point andthe reversal point will move away from each other if
short-term volatilityincreases. It is easy to see how this could happen:
the market moves, therange increases, and the stops are positioned
farther and farther away fromeach other. This might tend to reduce
whipsaws, but it can also increase theinitial risk on a trade after the
trade has been entered.Volatility breakout systems are trend
following systems. They are notdesigned for short term scalping
for limited objective trading. They aredesigned to get in on the
really big moves and stick with them until theend. As such it is
necessary to expand the stops when the market heats up –even if that
means increasing your initial stop. The alternative is to bethrown
out of a strongly developing move and then being faced with thedifficult
task of finding a low-risk re-entry point. The stronger the moveis
the harder it will be to get back in, because a pull-back may not
occuruntil it’s too late to catch the bulk of profits. Therefore
the best policyis to let the market determine the optimal placement of
stops.Professionals trade many markets concurrently to achieve a
smoother overallequity and reduce drawdown.Suggestions on
Making It Work - FiltersThere is no question that they should always
be in the right direction whena market is trending with enough
volatility to be worth trading at all. Thereal difficulty, common to
most trend-following approaches, is whipsaws whenthe markets have no
trend and low volatility.Over a long period, markets will be
alternately stagnant and dynamic withmost of the time spent in the
stagnant mode. Similar to moving averagesystems, a volatility system set
up for a trending market will not work wellin the sideways
periods.Obviously, a filter is needed. We can suggest several.
First, it is possibleto cut down the considerable initial risk on each
trade by creating aneutral zone between long and short entry
points.The simplest way to do this is to set a percentage risk stop
that is smallerthan the percentage of the ATR that triggers the entry.
For instance, in ourearlier example we had an ATR of 100 point in the
NYSE Composite, and wewould buy on a move upward of 150% of this, or 150
points.A tighter stop could be set by subtracting a smaller
percentage of the ATRfrom the entry point. We are afraid that anything
less than 100% of the ATRmight be classified as too close and subject to
almost random whipsaws, butusing a number like 125% still gives a
tighter stop level than our reversalpoint. If the risk stop is
triggered, the system is now neutral until thesell reversal at 150% is
hit, or until a new buy entry is reached.Another possible
improvement might be to avoid trades when a market isacting poorly,
especially when the volatility is unusually low. There maywell be
'windows' of optimum profitability for the ATR of each commoditywhere it
is within acceptable boundaries, neither too high or too low. It issafe
to assume that a stagnant market with a relatively small range
willresult in losing trades, while a more volatile market will tend to
be moreprofitable. The usual impulse is to re-optimize when the markets
becomestagnant, but it might be more profitable in the long run to sit
outcompletely during the quiet markets and wait until the ATR becomes
more inline with what your system normally needs to be
successful.A third possibility is to add an external filter,
something that identifiesconditions that must be met before a breakout
is taken. There are at leasttwo possibilities for this among readily
available technical studies:DMI/ADX and CCI. Our regular readers are
aware that we often mention that anupturn in Wilder's ADX signals that a
market is trending. Try tradingvolatility breakouts only when the 18-day
ADX is rising. (Up-Down Volatilityand Percent V serve a similar
function).Similarly, a 20-period CCI based on either monthly or
weekly signals willalso tell you to what extent a market is trending
over the longer term. Lookfor rapid acceleration of the CCI from its
null or zero line; if thiscondition exists, the market is probably
moving rapidly enough to makevolatility based trading highly profitable.
(CCI and Bollinger Bands aredifferent views of the same study
formula.)"
END
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REPLY FROM EQUIS
"Nick,I have read the article you
supplied and have pulled from it the followingconditions. Please
read them and verify they are what you want to usefor your entry and
exit conditions.Entry conditions:18-period ADX is
risingtoday's high is some percent of the ATR greater than yesterday's
high (for buys ) ORtoday's low is some percent of the ATR lower than
yesterday's low ( forshorts )Exit conditions:an entry
condition in the other directions ( a short signal when long ora buy
signal when short ) ORthe price moves a percentage of the ATR against
the position you are in.The article did not give set values for
several of the factors listedabove. These are:1) the
percentage of the ATR required for the entry signal2) the number of
periods used in calculating the ATR3) the percentage of the ATR used for
the stopDo you have values you want to be used, or would you rather the
systembe written to optimize on these values. If you want it to
optimizebased on these values, I will need you to specify the range you
wantthem to cover (ie. check ATR time periods 2 through 28).I
need you to verify and respond to the above information because we
arenot licensed financial consultants. Writing trading systems can
beconsidered offering financial advise so we err on the side of
caution.After you have responded, I can most likely provide the system
to youwithin a day or two. The fee for this system will be around
$60, unlesssome unforeseen technical difficulties
arise."
END
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