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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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