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Anyone had a go at a formula for the ATR ratchet in
Metastock??
Herve
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-----Original Message-----From:
Hengy <<A
href="mailto:hengy@xxxxxxxxxxxxxxxx";>hengy@xxxxxxxxxxxxxxxx>To:
metastock@xxxxxxxxxxxxx
<<A
href="mailto:metastock@xxxxxxxxxxxxx";>metastock@xxxxxxxxxxxxx>Date:
Saturday, 8 September 2001 12:01Subject: RE: Larry Williams'
"Volatility Breakout System"
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
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-----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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