Trading strategy: L.W. Volatility Break-out

Description

The L.W. Volatility Break-out strategy was developed by Larry Williams, a trader in the U.S. and the author of several trading books. Volatility Break-out strategies are based on the concept that if the market makes a movement of a certain size in a short period of time, this movement will continue for some time. The L.W. Volatility Break-out strategy is suitable for all instruments and is traded on a 5-minute chart.

The strategy in detail

The L.W. Volatility Break-out strategy bases itself on the highest price and the lowest price of the previous trading day. These prices are multiplied by 0,25 and added to and subtracted from the opening price. This results in Larry Williams’ break-out range.

This example shows the Larry Williams break-out range.

When to open a position?

When the market price rises above Larry Williams’ break-out range, a long position is opened. When the market price drops below Larry Williams’ break-out range, a short sell position is opened. Positions can be opened manually or automatically. The strategy contains alarms (pop-up message, sounds or e-mail) which can warn the trader when a buy or short sell signal occurs.

When to close a position?

The L.W. Volatility Break-out strategy uses a target, a stop loss and a time filter. The target and the stop loss are both placed at a distance from the entry point which is a multiple of Larry Williams’ break-out range. The default setting for both the target and the stop is 2x the size of the break-out range. This results in a Return/Risk ratio of 1.

If the position has not reached the target or has not been stopped out by 21.59 hours, the time filter will automatically close the position. For the target order, the stop loss order and the time filter to work automatically, the trader must activate the TradeGuard in the chart.

This example shows a buy signal. The market is up, but not sufficiently to reach the target order (green line). The market starts to drop and the stop loss order (red line) is reached. The position is closed with a loss.

This example shows a short sell signal. The target order (green line) is reached. The position is closed with a profit.

This example shows the time filter in action. The market price does no reach the target order (green line). The time filter closed the position at 21h59.

Conclusion

Volatility break-out strategies tend to perform well in a volatile or a directional market. They tend to suffer when the market moves sideways or when volatility is low. Adding a trend filter (SuperTrend, EMA ...) and/or a volatility measure (ATR ...) can increase the performance of break-out strategies.

These examples show back-tests for the standard Larry Williams Volatility Break-out strategy over several years. The results are variable but none are negative.

DAX.

DOW.

NASDAQ.

S&P 500.

CAC 40.

Bund.

Settings

These are the parameters you can change in the strategy. As usual they can be changed in the DesignerBar or directly in the chart.

The DesignerBar.

StartTime: Opening price based on which the break-out range is calculated. For U.S. markets put, for example, 1430 or 1530.

MaxLongPerDay: Indicate the maximum number of long signals you want during the day.

MaxShortPerDay: Indicate the maximum number of short sell signals you want during the day.

Range_factor_Stop: Indicate the distance of the stop order. Here 2x the break-out range.

Range_factor_Target: Indicate the distance of the target order. Here 2x the break-out range.

Practical implementation

Using the NanoTrader Full follow these steps:

• Select the financial instrument you wish to trade and open the chart.
• Select the template study "WHS L.W. Volatility Break-out" in the "WHS Strategies" folder.
• Adapt the settings as described above.
• If you want to trade semi-automatically, activate TradeGuard+AutoOrder in the chart. If you want to trade automatically, activate AutoOrder in the chart.