Volatility Breakout Systems

Volatility Breakout Systems


Breakout systems can actually be considered another form of swing trading, (which is a style of short-term trading designed to capture the next immediate move). In other words, the trader does not deal with any long term forecast or analysis, only the immediate price action.
Volatility breakout systems are based on the premise that if the market moves a certain percentage from the previous price level, the odds favor some continuation of this move. This sequel to last only one day, or go a little farther from the original entry price, but it is still enough profit to play for. A trader must be satisfied with what the market is willing to give.
With a breakout system, trade is always taken in the direction the market moves in that time. It usually enters through the buying or selling stop. The bit of continuation that we are playing is based on the principle that momentum tends to precede price. There is also another principle of price behavior that is at work to create trading opportunities. That is, the market tends to alternate between a period of equilibrium (balance between supply and demand forces) and a state of disequilibrium. This imbalance between supply and demand causes "range expansion", (the market looking for a new level), and that is what causes us to enter the trade.
There are several ways to create short-term volatility breakout systems. I found that different types of systems based on range expansion test quite similar. Therefore, no matter which method you choose should be a matter for your personal preference.
In designing the system, you can choose to place the stop entry or opening price or closing price the previous day. This entry ceases to be a function of range from the previous day or one percent from 2.10 the previous day range, etc. Mechanical outputs can range from using a fixed objective level of use of time as such work the next day you open or close. Most of these systems function best when very wide stop is used.
Another way of trading the breakout mode is by using "channel breakouts", which is simply buying the tallest height of the last seven days in case of a 7-time channel or the highest high of the last 2 days in case the 2nd period channel breakout. In the case of the inside day breakout pattern where one buys high and sells low of previous bar, 1-period channel breakout is actually used for activation. The most long term breakout system adapted by Richard Dennis on the train "Turtle" was a 4-week channel breakout originally designed by Richard Donchian. Other breakout systems can be based on chart patterns (eg, Curtis Arnold Pattern Probability System), Trendline breaks, breakouts above or below the band or envelope of prices, or variations on a simple choice expansion functions.