Trade CL, EC, ER2, US, ZG and ZS

Volatility Breakout systems are designed to take advantage of sharp jumps in price action. The trader is not concerned with forecast or analysis; he is only concerned with the immediate price action after a breakout.

Characteristics.

I measure the characteristics or conditions of a volatile markets by the difference or spread between two moving averages, percent rate of change, gap openings, or an increase in the daily (weekly, monthly) range and my proprietary %C indicator.

Volatility breakout systems are based on the working premise that if the market moves a certain amount in one direction, a certain measure in a single direction or a particular percentage from a previous price level pointing one way, the odds favour some continuation of the move in the same direction for a period of time.  The continuation period depends of the time frame being traded: day trade or swing trade for example or and the type of breakout pattern used. 

Breakout Patterns.

The most well know breakout methods are day trader patterns. As day traders we look for range days: a trading session where the market opens on its low and closes on its high and a intraday breakout takes the trader long. Alternately, the market opens on its high and closes on its low and an intraday breakdown takes the trader short.  As a natural rule ALL day trading systems exit no later than end of day but can exit anytime from entry to the end of day.

Keeping in mind a sense of proportion, a swing trade breakout system is looking for anything longer than a day range to capitalize on.  A range week for example can be defined where the open on Monday is at the low of the week and the close Friday at the high of the week and the inverse is true for a down range week. Just like the day trader, the swing trader has a breakout signal that takes it long or short to take advantage of the range. As a side bar, Monday does not need to be the opening day and set-ups for a two or three day range can be used.

Two primary techical rules.

So with a breakout system, a trade is always taken in the direction that the market is moving at the time. It is usually entered via a buy or sell stop or with trade robots at the orders are executed at the market. The bit of continuation that the trader is playing for is based on time-tested principle of technical analysis: that "momentum tends to precede price". This working premise goes back to technical analyst like 1970's trade advisor Marty Zweig, in that a surge of momentum is followed by price. Another rule I have written and expanded upon many times is a extrapolation from Elliott Wave Theory: the rule of Alternation, Where the Elliotitian uses "Alternation" to validate their description of corrective waves, the rule is much more pervasive in trading, I have sited that the behaviour of the market is one that cycles from rest to motion and back to rest. In other words the market tends to alternate between a period of equilibrium (a balance in the forces of supply and demand) and a state of disequilibrium or imbalance between supply and demand. When the market is not balanced, the trader witnesses increases in measurements in the patterns mentioned above. More important to traders, it causes an expansion of the high/low range. It is during these periods of expansion that the market is seeking new levels. It is this breakout behaviour that's causes the system to enter a trade. On the other hand and for contrast it is when your TV pundits smile and label the markets with price stability, that the market condition is not good for trading.

Basic Breakout Systems.

There are several ways to create short-term volatility breakout systems. I have compiled a good number of them over the years. The different types of systems based on a variety of bands, support and resistance, pivots and gap definitions.

For example my original system %C-DT was a channel breakout, which is simply buying a percent of range for the last "N days" plus the high with my %C as a filter.  Another way to create short-term volatility breakout systems is to use an inside day breakout pattern where one buys the high or sells the low of the previous bar, a 1-period channel breakout is actually being used for the trigger. The most famous long-term breakout system adapted by Richard Dennis originally developed by Dick Donchian was the 4-week channel breakout. All breakout systems seem to test profitably while some may need some fairly wide protective stops. Naturally some performed better than others and a few meet some very high standards.

True Blue Swing Trader.

True Blue my swing trader is also call  "STP" for commercial reasons or Swing Trader Pro. My years or research has shown me that the edge of a good day trading system improves when holding the position over night. For example the average trade on a day trader portfolio of systems can be net $75.00 after cost whereas the when the system holds over night to reach its targets the average trade jumps to $105.00 average trade.  This 40% increase in average trade edge is why people swing trade. Furthermore, True Blue while a good day trader is a much better swing trader based on a number of key statistics, Beside, I already offer a fine day trader in the Day Breaker Suite!

So people are clear, the 40% better edge is not risk free. The increase in edge comes with what the industry calls overnight risk.  There are many factors that bring people to day trading. One is for people who don't sleep well holding "risk" over night. Traditionally the vast majority of traders are swing traders. However, in the stock index boom market of the 1990's the super large high to low range made it a great opportunity to day trade and it was relatively easy to do so profitability. So the trend toward day trading has since been engrained. Furthermore, profitable day trading has now spilled over into almost all the markets that have electronic execution capability.  In small part, at least, this is due to the related reduction in transactions cost.

Personally, I hate to day trade. I do not like dead lines, full top. I prefer the freedom being able to hold over night to reach the system's targets. This has everything to do with style not the profitability of the day trading system as compared to the swing trader. So for the trader who is willing to take work with margin requirements and the inferred added risk of holding overnight, the increased edge is there for the taking.

In designing True Blue Swing Trader or STP as we call it sometimes, it is a true and traditional volatility breakout strategy based on bands real time projected based on today's open.  However, the system filters what trades it takes and which trades it will ignore.  For those of you who have followed my work, you will be familiar with the Quad Level support and resistance zones indicator, which I developed back in the 90's. The filtering takes place as to where the day's open is placed within the set of 9 price zones. This approach makes the systems more effective and unique versus or competitors.

Most systems as a rule and True Blue Swing Trader in particular function / perform best when a very wide variety of exits are used. The mechanical exits True Blue uses range from a variable percent gain objective to using a time function, to using price patterns set-ups before projecting or trailing an exit. Examples of price patterns used are long bars and gaps. Among others True Blue also uses a sequence of up and down closes to count when a change of direction is expected to exit a trade.

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Trade CL, EC, ER2, US, ZG and ZS