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Re: Larry Williams' "Volatility Breakout System"



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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
       
      **************************
      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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