BY DENNIS MEYERS, PH.D.
B
reakout systems are popular when markets are volatile. Such systems typically identify support and resistance levels when price has been moving in a range or channel, and enter trades when price breaks out of either the up side or down side of a channel.There are two simple ways to define support and resistance levels for price channels. In both cases, it is first necessary to define a lookback period. The first way is to use the highest high and the lowest low of the lookback period. The second way is to determine the range of each bar (high minus low) and add that range (or a percentage of it) to, or subtract it from, the current close.
In either case, the upper and lower boundaries represent the price channel. One advantage to the second method is it better reflects the volatility of the market — it will expand and con-tract as the volatility changes.
Breakout strategies require the market to be in a high-volatil-ity period; a trade will become profitable only if it continues to move in the direction of the breakout. Volatility and emotion go hand in hand. As volatility increases, traders have to cope with more risk; hence, the more emotional the market becomes. This is often reflected by the fact markets fall faster than they rise.
In the following system, the channel is determined by using the range of the price bars in the lookback period. A breakout above or below the channel’s resistance or support creates buy or sell signals.
However, the parameters for the buy signals will be different than those for the sell signals, because of the propensity for markets to fall faster than they rise. The range for the last x bars will be defined as the highest high of the last x bars (including the current bar) minus the lowest low of the last x bars (including the current bar).
The buy price is determined by adding a percentage of the range of the last n bars to the current close — the previously described volatility-adjusted technique. If the next bar’s price exceeds the buy price, the system issues a buy signal. The sell price is determined by subtracting a percentage (a different percentage than the buy percentage) of the range of the last m bars from the current close. If the next bar’s price falls below the sell price, the system issues a sell signal.
The resulting Multibar Channel Breakout system will trade the S&P 500 E-Mini futures on an intraday basis using one-minute bars. The TradeStation Code is shown in Figure 1 (opposite page).
Multibar Channel Breakout rules
This is a stop-and-reverse system, meaning it is always in the market: When a sell signal occurs, long trades are exited and a short trade is entered; when a buy sig-nal occurs, short trades are exited and a long trade is entered. These are the system’s parameters:
ES = E-Mini price;
BRange= the price range over the last n bars;
SRange= the price range over the last m bars;
bx= the percentage multiplier of the BRange for buy signals;
sx= the percentage multiplier of the SRange for sell signals;
c= the current price;
buyCh= c + bx*BRange;
sellCh= c - sx*SRange where
n =The number of lookback bars (including the cur-rent bar) for buy signals.
m = The number of lookback bars (including the current bar) for sell signals.
Notice that not only are the percentage multipliers for long (bx) and short trades (sx) different, the look-back periods the system references for buys (n) and sells (m) are also different. The trade rules are simple:
1. Buy rule: Buy the next bar at buyCh, stop.
2. Sell rule: Sell the next bar at sellCh, stop.
3. Intraday bar exit rule: Exit the position on the close (no overnight trades).
Although it may not be immediately obvious, this sys-tem avoids the opening gap whipsaw problem — trades being triggered because of large gap openings
ACTIVE TRADER • January 2004 • www.activetradermag.com 54
The system triggered more short trades during the test, but pro-duced profits on long trades, as well.
TABLE 1 MULTIBAR RANGE BREAKOUT SYSTEM
PERFORMANCE SUMMARY, JULY 7 TO AUG. 1, 2003
Source: TradeStation
All trades Long trades Short trades Total net profit $4,912.50 $1,450.00 $3,462.50 Gross profit $6,637.50 $1,912.50 $4,725.00 Gross loss ($1,725.00) ($462.50) ($1,262.50)
Profit factor 3.85 4.14 3.74
Open position P/L $0.00 $0.00 $0.00
Total number of trades 55 20 35
Percent profitable 58.18% 55.00% 60.00%
Winning trades 32 11 21
Losing trades 22 9 13
Even trades 1 0 1
Avg. trade net profit $89.32 $72.50 $98.93 Avg. winning trade $207.42 $173.86 $225.00 Avg. losing trade ($78.41) ($51.39) ($97.12) Ratio avg. winning/
avg. losing 2.65 3.38 2.32
Largest winning trade $700.00 $362.50 $700.00 Largest losing trade ($300.00) ($125.00) ($300.00) Largest winner as
% of gross profit 10.55% 18.95% 14.81%
Largest loser as
% of gross loss 17.39% 27.03% 23.76%
Net profit as
% of largest loss 1,637.50% 1,160.00% 1,154.17%
Max. consecutive
winning trades 5 5 4
Max. consecutive
losing trades 5 2 3
Avg. bars in
total trades 134.96 45.8 185.91
Avg. bars in
winning trades 166.88 69.18 218.05
Avg. bars in
losing trades 91.95 17.22 143.69
Max. drawdown
(intraday peak to valley) ($887.50) ($862.50) ($975.00) Max. drawdown
(trade close to trade close) ($300.00) ($175.00) ($400.00) Max. trade drawdown ($475.00) ($475.00) ($362.50)
55 www.activetradermag.com • January 2004 • ACTIVE TRADER This list contains each trade in the test period. Overall, 58.18 percent of trades were profitable.
TABLE 2 TRADE-BY-TRADE SUMMARY: JULY 7 TO AUG. 1, 2003
Source: Meyers Analytics, LLC
Entry Entry Entry Exit Exit Exit Bars Trade Trade Trade
date time price ($) date time price ($) in trade $P&L max$Pft Time max$DD Time 7/7/03 10:36 Sell 1,003.75 7/7/03 12:35 1,002.50 119 $62.50 $175.00 12:06 ($12.50) 10:36 7/7/03 12:35 Buy 1,002.50 7/7/03 12:52 1,001.50 17 ($50.00) $0.00 12:35 ($50.00) 12:38 7/7/03 12:52 Sell 1,001.50 7/7/03 13:01 1,002.75 9 ($62.50) $25.00 12:55 ($62.50) 13:01 7/7/03 13:01 Buy 1,002.75 7/7/03 13:24 1,002.50 23 ($12.50) $37.50 13:23 ($25.00) 13:08 7/7/03 13:24 Sell 1,002.50 7/7/03 15:15 1,002.75 111 ($12.50) $87.50 14:22 ($112.50) 13:47 7/8/03 9:51 Sell 1,002.00 7/8/03 14:09 1,004.25 258 ($112.50) $62.50 11:21 ($175.00) 10:19 7/8/03 14:09 Buy 1,004.25 7/8/03 15:15 1,007.50 66 $162.50 $187.50 14:48 ($62.50) 14:11 7/9/03 9:33 Sell 1,007.75 7/9/03 15:15 1,001.00 342 $337.50 $525.00 11:03 $0.00 9:33 7/10/03 8:58 Sell 992.50 7/10/03 15:15 988.75 377 $187.50 $512.50 13:48 ($62.50) 9:04 7/11/03 9:05 Sell 993.25 7/11/03 15:15 997.75 370 ($225.00) $62.50 9:08 ($337.50) 11:23 7/14/03 9:54 Sell 1,012.25 7/14/03 15:15 1,002.75 317 $475.00 $575.00 14:46 ($112.50) 10:01 7/15/03 9:05 Sell 1,002.75 7/15/03 15:15 1,000.75 370 $100.00 $362.50 14:05 ($275.00) 9:46 7/16/03 8:48 Sell 1,000.50 7/16/03 12:10 993.25 202 $362.50 $625.00 10:12 $0.00 8:48 7/16/03 12:10 Buy 993.25 7/16/03 12:22 992.25 12 ($50.00) $0.00 12:10 ($50.00) 12:18 7/16/03 12:22 Sell 992.25 7/16/03 15:15 995.25 173 ($150.00) $187.50 14:30 ($150.00) 15:10 7/17/03 9:04 Sell 988.25 7/17/03 11:01 986.25 117 $100.00 $275.00 9:39 $0.00 9:04 7/17/03 11:01 Buy 986.25 7/17/03 11:02 983.75 1 ($125.00) $0.00 11:01 ($125.00) 11:02 7/17/03 11:02 Sell 983.75 7/17/03 15:15 980.50 253 $162.50 $337.50 14:01 ($25.00) 11:06 7/18/03 8:49 Sell 986.00 7/18/03 11:27 985.25 158 $37.50 $287.50 9:20 ($25.00) 9:02 7/18/03 11:27 Buy 985.25 7/18/03 12:02 985.50 35 $12.50 $62.50 11:31 ($12.50) 11:27 7/18/03 12:02 Sell 985.50 7/18/03 13:01 985.50 59 $0.00 $50.00 12:19 ($25.00) 12:03 7/18/03 13:01 Buy 985.50 7/18/03 14:35 991.50 94 $300.00 $375.00 14:11 $0.00 13:01 7/18/03 14:35 Sell 991.50 7/18/03 15:15 990.00 40 $75.00 $75.00 14:53 ($87.50) 14:41 7/21/03 8:32 Sell 988.00 7/21/03 15:15 978.25 403 $487.50 $700.00 14:10 ($12.50) 8:32 7/22/03 9:20 Sell 976.75 7/22/03 10:01 978.50 41 ($87.50) $112.50 9:50 ($87.50) 10:01 7/22/03 10:01 Buy 978.50 7/22/03 11:37 985.75 96 $362.50 $500.00 11:10 ($75.00) 10:18 7/22/03 11:37 Sell 985.75 7/22/03 14:37 987.25 180 ($75.00) $237.50 12:37 ($150.00) 14:02 7/22/03 14:37 Buy 987.25 7/22/03 15:15 986.75 38 ($25.00) $25.00 14:38 ($87.50) 14:49 7/23/03 8:35 Sell 986.25 7/23/03 12:51 984.75 256 $75.00 $412.50 11:16 $0.00 8:35 7/23/03 12:51 Buy 984.75 7/23/03 13:38 986.50 47 $87.50 $187.50 13:35 ($37.50) 12:55 7/23/03 13:38 Sell 986.50 7/23/03 14:27 986.75 49 ($12.50) $100.00 14:14 ($50.00) 13:39 7/23/03 14:27 Buy 986.75 7/23/03 15:15 987.75 48 $50.00 $62.50 15:13 ($62.50) 14:35 7/24/03 9:21 Sell 995.50 7/24/03 12:45 993.75 204 $87.50 $162.50 9:50 ($50.00) 10:27 7/24/03 12:45 Buy 993.75 7/24/03 13:10 994.25 25 $25.00 $62.50 12:57 $0.00 12:45 7/24/03 13:10 Sell 994.25 7/24/03 15:15 980.25 125 $700.00 $762.50 14:57 ($25.00) 13:11 7/25/03 8:43 Buy 982.50 7/25/03 9:01 983.25 18 $37.50 $150.00 9:00 ($37.50) 8:45 7/25/03 9:01 Sell 983.25 7/25/03 13:01 989.25 240 ($300.00) $375.00 9:52 ($337.50) 12:33 7/25/03 13:01 Buy 989.25 7/25/03 15:08 996.00 127 $337.50 $412.50 14:54 ($87.50) 13:25 7/25/03 15:08 Sell 996.00 7/25/03 15:15 997.00 7 ($50.00) $0.00 15:08 ($62.50) 15:12 7/28/03 8:33 Sell 995.50 7/28/03 12:37 996.50 244 ($50.00) $175.00 8:52 ($187.50) 10:29 7/28/03 12:37 Buy 996.50 7/28/03 12:57 996.25 20 ($12.50) $100.00 12:55 ($12.50) 12:37 7/28/03 12:57 Sell 996.25 7/28/03 15:15 993.50 138 $137.50 $187.50 14:42 ($87.50) 14:04 7/29/03 9:01 Sell 991.25 7/29/03 10:34 986.75 93 $225.00 $450.00 9:34 $0.00 9:01 7/29/03 10:34 Buy 986.75 7/29/03 11:28 992.00 54 $262.50 $450.00 10:58 ($12.50) 10:34 7/29/03 11:28 Sell 992.00 7/29/03 15:15 989.00 227 $150.00 $300.00 14:17 ($250.00) 12:33 7/30/03 8:34 Sell 990.00 7/30/03 11:38 989.25 184 $37.50 $275.00 10:32 ($37.50) 9:56 7/30/03 11:38 Buy 989.25 7/30/03 11:56 988.00 18 ($62.50) $0.00 11:38 ($62.50) 11:52 7/30/03 11:56 Sell 988.00 7/30/03 13:02 988.75 66 ($37.50) $62.50 12:19 ($50.00) 12:01 7/30/03 13:02 Buy 988.75 7/30/03 13:04 987.00 2 ($87.50) $0.00 13:02 ($87.50) 13:04 7/30/03 13:04 Sell 987.00 7/30/03 15:15 986.25 131 $37.50 $125.00 13:14 ($25.00) 14:21 7/31/03 9:00 Buy 995.75 7/31/03 11:20 1,001.25 140 $275.00 $387.50 10:14 ($400.00) 9:08 7/31/03 11:20 Sell 1,001.25 7/31/03 13:07 1,003.00 107 ($87.50) $37.50 11:40 ($112.50) 12:14 7/31/03 13:07 Buy 1,003.00 7/31/03 13:22 1,002.25 15 ($37.50) $12.50 13:19 ($50.00) 13:16 7/31/03 13:22 Sell 1,002.25 7/31/03 15:15 988.50 113 $687.50 $725.00 14:56 ($12.50) 13:22 8/1/03 8:46 Sell 983.50 8/1/03 15:15 979.50 389 $200.00 $300.00 9:35 ($125.00) 8:51
that quickly reverse and stop out the position. With this sys-tem, if there is a gap on the opening bar, the buy and sell ranges are expanded and no trades are made until the buy and sell ranges contract or the price breaks the expanded ranges.
Breaking the expanded ranges takes time and avoids the open-ing gap whipsaw.
Testing
The system was tested from July 7 through Aug. 1, 2003, using September 2003 E-Mini futures (ESU03) one-minute bars. A wide range of parameter values was tested to find the optimal ones for the system. The parameter ranges tested for the initial optimization test were:
n =10 to 50 in steps of 5;
bx = 0.4 to 1 in steps of 0.05;
m = 10 to 50 in steps of 5;
sx = 0.4 to 1 in steps of 0.05;
After the initial test, we had to choose one set of parameters that produced the most realistic results. To avoid curve fitting, we eliminated all results that had profit factors (gross profit divided by gross loss) greater than 4.0, since such performance was unlikely to be duplicated in the future. Also, because it is
difficult to sustain more than a handful of consecutive losses, we eliminated all cases that had more than five losing trades in a row. Of the remaining test results, we chose the one that had the highest total net profit and the lowest drawdown. The opti-mization procedure produced the following system parame-ters:
n = 45;
bx = 0.45;
m = 15;
sx = 0.45;
Table 1 (p. 43) shows the performance summary for the four-week test period (slippage and commissions not included).
Table 2 (opposite page) is a trade-by-trade summary of all the trades. The average net profit per trade was $89 — well above slippage and commissions for a typical S&P E-Mini trade. The largest losing trade was $300, and the biggest intraday draw-down was $887. These losses are small compared to the total net profit of $4,912.
Figures 2 and 3 are one-minute charts of the S&P E-Mini that span July 31 to Aug. 1. The Multibar Range Breakout chan-nels are superimposed on the price series, and all the buy and sell signals are marked. Finally, the bottoms of Figures 2 and 3
ACTIVE TRADER • January 2004 • www.activetradermag.com 56
September 2003 S&P E-Mini futures (ESU03), one-minute
Short
Buy
Buy Short
Short End of day
exit End
of day exit
7/30 9:11 9:33 9:55 10:17 10:39 11:01 11:23 11:45 12:07 12:29 12:51 13:13 13:35 13:57 14:19 14:41 8/1
1,010
1,005
1,000
995
990
985
980 During this period, the system caught one intraday uptrend, one intraday downtrend, and produced small losses on two signals when the market was flat.
FIGURE 2 RIDING THE TREND
Source: TradeStation
600 400 200 0 -200
include the bar-by-bar profit or loss of each trade.
Figure 4 is a daily chart of the S&P E-Mini futures from July 7 to Aug. 1, and shows the market moved up, down and sideways during this period. The system was able to produce profits on both the long and short sides of the market, and aside from a streak of five losing trades near the outset of the test period, never had more than three consecutive losses.
The Multibar Channel Breakout sys-tem’s positive performance warrants further investigation. If you consider following this system in real-time, pay close attention to how the real-time sta-tistics compare to the hypothetical num-bers shown here. If the numnum-bers begin to deviate, another review of the system parameters are in order.
Individual articles can be purchased and downloaded from www.activetradermag.com/
purchase_articles.htm.
57 www.activetradermag.com • January 2004 • ACTIVE TRADER
September 2003 S&P E-Mini futures (ESU03), one-minute
14:19 14:41 8/1 9:02 9:24 9:46 10:08 10:30 10:52 11:14 11:36 11:58 12:20 12:42 13:04 13:26 13:48 14:10 14:32 14:54 1,002 1,000 998 996 994 992 990 988 986 984 982 980 978 976
600 400 200 0 If no signal in the opposite direction is triggered, the system will stay in the same direction the entire day. All trades are exited at the close — no positions are held overnight.
FIGURE 3 ONE DAY, ONE TRADE
Source: TradeStation
September 2003 S&P E-Mini futures (ESU03), daily
7 14 21 28
1,015 1.010 1,005 1,000 995 990 985 980 975 The daily chart of the test period shows the system was able to profit on both sides of the market when conditions shifted from uptrend to downtrend to consolidation.
FIGURE 4 DAILY PERSPECTIVES
Source: TradeStation
End of day exit End of
day exit Sell
58 www.activetradermag.com • September 2001 • ACTIVE TRADER Markets:Stocks, stock index futures, index stocks
(SPDRs, DIAs, QQQs), futures and currencies System logic:
This system is based on a simple pattern, named TD Carrie, described by Tom DeMark in his book New Market Timing Techniques (John Wiley & Sons, 1997).
It trades a move above or below the true high (the highest of one bar’s high and the previous bar’s close) or the true low (the lowest of one bar’s low and the previous bar’s close) of the bar four days prior to the current (active) bar. However, for the breakout to be valid it must be qualified by a few cri-teria. (The following rules are described in terms of a long trade; reverse for short trades.)
First, to identify a strongly trending market, the
true high of four days ago must be higher than the high five days ago.
If this requirement is not met, it’s still possible to get an entry signal if the market has made a correction counter to the direction of an even-tual trade (i.e., a downward correction in the case of a long trade). In an uptrend this correction is identified by the highs of either two or three days ago being lower than the true high of four days ago.
Second, the close of the bar prior to the anticipated breakout needs to be lower then the previous bar’s close. This is to ensure that most traders still have a short-term bearish outlook prior to the upside breakout. That will increase the force of the up move as the traders are caught on the wrong side of the market and scramble to get out of the market.
Finally, the breakout must take place intraday and exceed the true high of four days ago by a sufficient amount. That the trade needs to take place intraday means, for a valid upside breakout, the open-ing price of the day for the breakout must be lower than the true high of four days ago. This is to avoid entering into too strong an opening, which often marks the end of the current trend. Also, by
requiring the breakout to take place intraday, we enter into an orderly market instead of a highly volatile one.
Rules:
1. Prepare to go long todayif
a.the true high from four days ago is higher than the high from either two, three or five days ago, and
b.yesterday’s close is lower than the close two days ago, and c.today’s open is lower than the high four days ago.
2. Prepare to go short todayif
a.the true low from four days ago is lower than the low from either two, three or five days ago, and
b.yesterday’s close is higher than the close two days ago, and c.today’s open is higher than the low four days ago
3. Go long today with a stop orderat the true high of four days ago, plus 0.1 percent.
4. Go short today with a stop orderat the true low of four days ago, minus 0.1 percent.
5. Risk2 percent of available equity per trade.
6. Exit all trades with a lossif the market moves against the position by 4 percent or more.
7. Exit all trades with a profit if the market moves in favor of the position by 12 percent or more.
8. Exit all trades after five days, counting the day for the entry as day one, and no matter how late in the day the trade was made (i.e., a trade executed at 2:50 p.m. on Monday would be exit-ed Friday the same week).
Test period:November 1991 to June 2001 Test data:Daily stock prices for the 30 highest capitalized stocks in the Nasdaq 100 (excluding Intel and Microsoft, which are also part of the Dow Jones Industrial Average). $10 commission deducted per trade.
Starting equity:$100,000 (nominal) Buy-and-hold stats:
DJIA: Total return – 254 percent; Max DD – 22.5 600,000 Source: TradeStation by TradeStation Group Inc.
SX#3
11/12/91 11/12/92 11/12/93 11/12/94 11/12/95 11/12/96 11/12/97 11/12/98 11/12/99 11/12/00