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Capturing Trend Days

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by Linda Bradford Raschke -  Dec 24, 2004
7.7 (from 60 ratings)

A Few Words on Volatility Breakout Systems

Trading a mechanical breakout system can provide invaluable experience. The average net profit for the majority of these systems is quite low, so they may not guarantee a road to riches; but they serve as a terrific vehicle to gain a wealth of experience in a very structured format.

If you are going to trade a mechanical system, you must be willing to enter all trades! It is impossible to know which trades will be winners and which ones losers. Most traders who "pick-and-choose" have a knack for picking the losing trades and missing the really big winners. The hardest trades to take tend to work out the best! With most systems, a majority of the profits come from less than 5% of the trades.

Though most breakout methods have a high initial risk point, their high win/loss ratio makes them easier to trade psychologically. You might get your teeth kicked in on the losers, but, fortunately, big losses do not happen very often. Also, if trading a basket of markets, as one should with a volatility breakout system, diversification should help smooth out the larger losses.

To summarize the main benefits of trading a breakout system:

  • It teaches proper habits, in that there is always a well-defined stop;
  • You get lots of practice executing trades;
  • It teaches the importance of taking every trade;
  • It teaches respect for the trend.

Additional Considerations when using Breakout Strategies

  • Overall average daily trading range (must be high enough to ensure wide "spread");
  • Volume and liquidity;
  • Seasonal tendencies (e.g., grains are better markets in spring and summer);
  • Relative strength;
  • Commercial composition.

(click to enlarge)

Volatility Breakout System - An equity curve for a simple volatility breakout system that enters on range expansion off the previous day's CLOSE and exits the next day. Once again, the market opened on one extreme of its range and closed on the other. It made a steady pattern of lower highs and lower lows all day.
(click to enlarge)

Volatility Breakout System - This volatility system is based on range expansion off the OPENING price and then exiting on the next day's close. Over the long run, entering on range expansion off the opening price or off the previous day's close does equally well. In this case, entering on a breakout off the opening price resulted in a higher equity peak at one point but a larger drawdown later.

This article reprinted with the kind permission of LBR Group

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Comment on this Article

Recent Comments:
There is nothing new in this article . Most basic traders know all that any way .. Market is made of cycles . when cycle node's ( LOW, HIGH) on different time frame match then you have the birth of a trend . Other wise you have in decision or consolidation , There for if you want to catch a trend you need to use oscillators to measure tops or bottoms of various cycles and position yourself accordingly ... some oscillaotrs are better than others .. so if you want to...
Grey1   02-01-2007 20:53:50
Capturing a trendy day can be very rewarding. Reading the signs that alert a trader to a trendingy day are even more important. Most people are acting countertrend throughout the whole day and adding to an already losing position which they eventually have to close with an enormous loss. It's therefore imperative that we know how to recognize these days.
firewalker99   02-01-2007 16:47:18
Trend is a very relative term. If you are trading a 1 minute chart, how do you define trend? It always amazes me how we all spend so much time trying to "trade the trend" when the markets in their efforts to facilitate trade actually spend very little time trending. The word "Trend" should be called sentiment anyway.
Sweetlettuce   29-05-2005 20:39:37
Quote: Originally Posted by tradershort what good is learning a system that great "to learn" with but only nets low profits? Thanks Linda, but no thanks. Capturing 2 trend days a month, is not low profit. Learning what causes a trend day, and then acting on it, can make you very wealthy. Learning when a trend day is not likely, can save that wealth.
sulong   21-05-2005 13:24:40
what good is learning a system that great "to learn" with but only nets low profits? Thanks Linda, but no thanks.
tradershort   21-05-2005 13:10:57

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