Volatility Breakouts

Volatility Breakouts

Rules: if c > 12 week ema of close, then buy @ 1 week high + 1 tick stop.

exit long at Volatility_Stop stop

Volatility_Stop = c[1] - average true range of past 4 weeks * ATR factor (ATR in tables below). Caveat: Volatility_Stop is only increased when long, never decreased.

Dow Jones Industrial Average, 2/88 - 12/98:

ATR	Net Profit	PF	n	%	Profit/trade:
.50	2153.41	1.58	98*	42	21.97
1.00	2455.99	1.73	64	47	38.37
1.50	4082.09	3.60	34	47	120.06
2.00	3555.30	2.80	25	44	142.21
2.50	4603.28*	6.08*	16	63*	287.70*

Note here that the wider the swing allowed, the more netprofitability and profit/trade. However, 1.50 seemed superior to 2, although it generated less per trade.

For comparison, the results of the 1 week/ 3 week 12 week EMA system are shown below (buy stop at high of week stop, sell stop at trailing 3 week low, but only go long if the close is > 12 week EMA). Increasing the ATR factor also decreases the number of trades that need to be made.

	Net Profit	PF	n	%	Profit/trade:
	2713.53	2.01	50	38	54.27

Note that any ATR factor above 1.0 is superior to the breakout system, and all are superior in terms of percent of trades profitable. Anything above 1 ATR is superior in terms of profit/trade.

Note that the MACD (12/26/6) system (buy stop at high of week if MACD > xaverage of MACD, sell stop at low if MACD <>

	Net Profit	PF	n	%	Profit/trade:
	4232.17	12.25	17	71	248.95

Best Buy 1/5/90 - 11/27/98:

MACD 12 / 26 /6:

	Net Profit	PF	n	%	Profit/trade:
	26.69	3.87	14	64	1.91

1 week/ 3 week breakout with 12 week EMA filter:

50.95

6.15

25

56

2.04

Volatility System:

ATM	Net Profit	PF	n	%	Profit/trade:
.50	40.16	2.95	55	49	.73
1.00	33.02	2.26	36	50	.92
1.50	32.30	2.39	23	52	1.40
2.00	29.35	2.51	16	56	1.83
2.50	42.87*	7.64*	12	58*	3.57*
3.00	34.71	5.28	12	58	2.89
3.50	7.08	1.96	9	44	.79
4.00	7.92	2.68	8	50	.99
4.50	5.20	1.93	8	50	.65
5.00	6.55	2.01	6	33	1.09
5.50	5.51	2.03	5	40	1.10
6.00	3.81	1.63	5	40	.76
6.50	2.11	1.31	5	40	.42
7.00	.41	1.06	5	40	0.08
7.50	3.74	2.19	4	50	.93
8.00	2.46	1.70	4	50	.61
8.50	1.24	1.32	4	50	.31
9.00	.28	1.07	4	50	0.07
9.50	-.62	.86	4	50	-.16
10.00	.85	1.17	3	33	.28

Note that increasing the ATM factor increases the profit factor, but that net profitability actually drops until ATM increases above 2, then drops off after 2.5. Percent profitability rises in direct correlation with ATM factor and the profit/trade also increases. Anything in the 2-3 range is superior to the breakout system in terms of profit/trade, but the breakout system is superior to all volatility systems in terms of total profitability.

Micron Technology, 6/8/84 - 11/27/98:

ATM	Net Profit	Profit Factor:	n	%	Profit/trade:
.50	40.60	2.02	84	49	.48
1.00	52.10*	2.44	50	50	1.04
1.50	50.53	3.21	33	61*	1.53
2.00	51.25	2.95	24	58	2.14
2.50	42.74	2.70	20	60	2.14
3.00	47.81	5.82*	15	60	3.19
3.50	44.65	4.66	11	45	4.06*
4.00	34.35	3.36	11	45	3.12
4.50	25.22	2.52	10	40	2.52
5.00	15.27	1.79	10	30	1.53
5.50	20.73	3.58	7	29	2.96
6.00	14.64	2.52	5	40	2.93
6.50	8.41	1.71	5	40	1.68
7.00	4.44	1.31	5	40	.89
7.50	11.27	3.36	3	67	3.76
8.00	-4.65	0.06	2	50	-2.33
8.50	-5.00	0.03	2	50	-2.50
9.00	-5.34	.00	2	0	-2.67
9.50	-5.69	.00	2	0	-2.84
10.00	-6.03	.00	2	0	-3.01

Note that anything in the 1-3 ATM range was good as far as net profitability; the most profit/trade was generated with 3.5 ATM and the biggest profit factor was with 3 ATM.

Just to insure the 12 week EMA screen wasn't filtering out good trades, I took it out to see how the system would perform "raw":

ATM	Net Profit	Profit Factor:	n	%	Profit/trade:
.50	52.03	1.82	136	43	.38
1.00	51.22	1.79	87	46	.59
1.50	36.76	1.60	57	47	.64
2.00	26.46	1.39	39	44	.68
2.50	21.56	1.35	34	44	.63
3.00	14.67	1.26	23	48	.64
3.50	27.10	1.68	15	40	1.81
4.00	33.94	2.35	14	43	2.42
4.50	24.10	1.87	13	38	1.85
5.00	15.00	1.51	12	42	1.25
5.50	12.22	1.51	9	56	1.36
6.00	22.29	4.33	6	50	3.72
6.50	16.47	4.07	5	60	3.29
7.00	12.62	3.22	5	60	2.52
7.50	11.37	3.75	3	33	3.79
8.00	-4.48	.00	2	0	-2.24
8.50	-4.82	.00	2	0	-2.41
9.00	-5.17	.00	2	0	-2.58
9.50	-5.51	.00	2	0	-2.76
10.00	-4.61	0.05	2	50	-2.30

Note here that the 12 week EMA filter does a good job of filtering out poor trades and that the net profitability drops off sharply as the ATM rises above .5. The profitability per trade is horrible, as is the profit factor. Conclusion: the EMA works as a nice filter.

Breakout System (1w/3w) + 12 week EMA:

	Net Profit	PF:	n	%	Profit/trade:
	71.17	3.75	51	51	1.40

Note that although the breakout system manages to capture more net profits, its profitability per trade is less than the volatility system. It took 51 trades to capture the profits that the ATM system with a factor of 2 caught in 24. Taking commisions into account (which this testing didn't) not to mention psychological wear and tear, and I'm sure the volatility system is superior.

MACD 12/26/6:

	Net Profit	PF:	n	%	Profit/trade:
	17.89	1.42	30	37	.60

The MACD system did very poorly, both in terms of net profitability, profit factor, and profits per trade. The problem with the MACD is that it is a derivative of a derivative of price. It therefore lags badly and is not in synch with the market. It must be optimized, which always makes me suspicious, whereas the breakout system and volatility system both seem rather robust.

Fidelity Select Electronics:

	Net Profit	PF	n	%	Profit/trade:
MACD	15.45	2.21	13	46	1.19
Breakout	23.03	3.68	29	52*	.79
Volatility	24.98*	7.31*	16	50	1.56*

ATM = 2

Note the volatility system is superior in all counts except for percent profitability. It not only earns more net profitability, but does so with fewer trades.

An optimization report follows (the ATM of 2 was arbitrarily chosen above, not optimized):

ATM	Net Profit	PF	n	%	Profit/trade:
.50	20.62	3.11	44	55	.47
1.00	20.61	3.32	36	50	.57
1.50	22.90	3.88	25	52	.92
2.00	24.98*	7.31*	16	50	1.56
2.50	23.96	6.64	11	55	2.18*
3.00	19.65	4.23	11	55	1.79
3.50	16.89	3.16	8	63	2.11
4.00	13.96	2.62	8	63	1.75
4.50	13.86	2.18	7	57	1.98
5.00	11.33	1.87	7	57	1.62
5.50	17.95	3.20	5	60	3.59
6.00	18.00	3.17	4	50	4.50
6.50	17.10	3.04	4	50	4.28
7.00	23.97	100.00	2	100	11.99
7.50	22.34	100.00	2	100	11.17
8.00	21.78	100.00	2	100	10.89
8.50	21.22	100.00	2	100	10.61
9.00	20.66	100.00	2	100	10.33
9.50	19.95	100.00	2	100	9.98
10.00	21.32	100.00	1	100	21.32

2 ATM seems a reasonable number to use for a trailing stop. Of course, a variation could be to sell half at 2, another half at 2.5, etc., but this needs to be tested.

Fidelity Select Home Finance, 7/90 - 11/98:

ATM	Net Profit	PF	n	%	Profit/trade:
Breakout 1w/3w	34.97	4.27	34	65	1.03
MACD	34.05	15.55	14	79	2.43
Volatility Breakout	36.86*	5.86	23	78	1.60

ATF = 2.00

Once again, the volatility breakout system is superior in terms of net profitability and profit/trade compared to the raw breakout system. Note that although MACD shows a higher profit per trade, MACD does not capture as much total profit, nor does it offer a meaningful stop at the beginning of the trade. Also, FSVLX is a very trend-worthy fund, so the MACD's usefulness is perhaps overstated here.

An optimization table follows (note that the results are slightly different here since a different Max bars back setting was used).

ATM	Net Profit	PF	n	%	Profit/trade:
.50	44.41	6.55	57	58	.78
1.00	41.25	7.05	41	68	1.01
1.50	43.15	10.39	28	71	1.54
2.00	38.30	6.05	23	78	1.67
2.50	40.09	9.22	18	83	2.23
3.00	37.97	8.32	13	77	2.92
3.50	39.69	16.91	10	80	3.97
4.00	38.37	13.87	10	80	3.84
4.50	38.55	12.62	8	88	4.82
5.00	48.80	100.00	4	100	12.20
5.50	48.28	100.00	3	100	16.09
6.00	47.84	100.00	3	100	15.95
6.50	47.31	100.00	3	100	15.77
7.00	46.62	100.00	3	100	15.54
7.50	46.03	100.00	3	100	15.34
8.00	45.39	100.00	3	100	15.13
8.50	45.09	100.00	3	100	15.03
9.00	44.61	100.00	3	100	14.87
9.50	44.12	100.00	3	100	14.71
10.00	44.35	100.00	2	100	22.17

Note that the 2-3 ATM factor area is very respectable and profitable.

TelMex (TMX) 5/17/91 - 11/27/98:

Here the 12 week EMA filter hurt results badly, so I removed it in testing.

	Net Profit	PF	n	%	Profit/trade:
Breakout 1w/ 3w	29.67	1.43	44	48	.67
MACD 12/26/6	20.16	1.87	14	43	1.44
Volatility Breakout	26.53	1.68	23	52	1.15

ATM = 2

Note that although the raw breakout system has a higher net profitability, it generates this with twice as many trades (44 v. 23) and has a much lower profit/trade (.67 v. 1.15). After commissions, the volatility breakout system would most likely be superior.

The MACD system performed well here, with the highest profit factor and profit/trade, but left about a third of the profits on the table that the other systems captured.

An optimization table follows:

ATM	Net Profit	PF	n	%	Profit/trade:
.50	26.13	1.34	73	38	.36
1.00	17.92	1.21	52	38	.34
1.50	14.28	1.22	32	44	.45
2.00	26.53	1.68	23	52	1.15
2.50	32.69	2.09	18	44	1.82
3.00	26.48	1.89	13	46	2.04
3.50	15.69	1.47	12	50	1.31
4.00	10.38	1.33	11	55	.94
4.50	-2.52	.93	11	45	-.23
5.00	-9.12	.80	10	40	-.91
5.50	-1.52	.95	8	50	-.19
6.00	12.47	1.67	5	60	2.49
6.50	26.97	18.80	4	75	6.74
7.00	22.41	6.74	4	50	5.60
7.50	19.59	5.01	4	50	4.90
8.00	15.03	2.97	4	50	3.76
8.50	18.04	7.48	3	67	6.01
9.00	15.43	5.33	3	67	5.14
9.50	12.82	3.95	3	67	4.27
10.00	10.21	2.99	3	67	3.40

Note that the 2-3 ATM region performed well both on a net profit and profit per trade basis.

General Motors 2/26/93 - 11/27/98

ATM	Net Profit	PF	n	%	Profit/trade:	Profit/trade:
Breakout 1w/ 3w	11.32	1.22	34	38	.33
Plus 12 week EMA:	15.96	1.57	20	50	.80
MACD 12/26/6:	24.68	11.64	7	71	3.53
Volatility Bko 2	7.62	1.21	16	50	.48
Plus 12 week EMA:	9.95	1.62	11	64	.90

Both the breakout system and volatility system were improved by the 12 week EMA filter, but both underperformed MACD on a net profit basis and on a per trade basis. However, the volatility system was superior to the breakout system on a profit/trade basis, both with (.90 v. .80 per trade) and without (.48 v. .33) the 12 week EMA filter.

An optimization table for the Volatility breakout + moving average system follows:

ATM	Net Profit	PF	n	%	Profit/trade:
.50	12.51	1.38	31	39	.40
1.00	14.48	1.54	21	52	.69
1.50	7.60	1.27	16	56	.48
2.00	9.95	1.62	11	64	.90
2.50	17.66	5.59	7	86	2.52
3.00	11.33	3.14	6	83	1.89
3.50	6.16	1.61	5	60	1.23
4.00	5.37	1.52	4	75	1.34
4.50	11.32	100.00	3	100	3.77
5.00	7.29	11.48	3	67	2.43
5.50	10.18	5.57	2	50	5.09
6.00	7.21	2.99	2	50	3.60
6.50	4.54	1.96	2	50	2.27
7.00	1.88	1.32	2	50	.94
7.50	-.79	.89	2	50	-.39
8.00	-8.00	.00	1	0	-8.00
8.50	-9.10	.00	1	0	-9.10
9.00	-10.19	.00	1	0	-10.19
9.50	.00	100.00	0	0	.00

Note that these results are somewhat unstable, but the 2-3 ATM region continues to be one of the most profitable.

Dell, 6/10/94 - 11/27/98

ATM	Net Profit	PF	n	%	Profit/trade:
.50	36.59	3.89	33	58	1.11
1.00	37.16	5.45	19	74	1.96
1.50	31.93	2.97	11	45	2.90
2.00	42.40*	10.35	7	71	6.06
2.50	41.04	100.00	4	100	10.26
3.00	36.46	100.00	3	100	12.15*
3.50	18.04	100.00	2	100	9.02
4.00	17.10	100.00	2	100	8.55
4.50	16.17	100.00	2	100	8.09
5.00	.22	100.00	1	100	.22
5.50	.00	100.00	0	0	.00

Note that Dell performs extraordinarily well around the 2-3 area with a maximum net profit at 2 ATM and maximum per trade profit at 3 ATM. 2 ATM gave outstanding results.

Moving Average High Low (Rolling Stock)

Rules: buy limit @ EMA of lows of lomalen (12w).

sell limit @ EMA of highs of himalen (12w).

1. Chevron:

Note that this system performs just as well as buy and hold with only a fraction of the exposure. An extraordinary 92% of trades are profitable with the average losing trade much smaller than the average trade.

MovAvg Hi/Lo Rolling CHEVRON CP n-Weekly 04/12/91 - 12/25/98

Performance Summary: All Trades

Total net profit			$ 59.76					Open position P/L				$ 0.00
Gross profit			$ 62.24					Gross loss				$ -2.48
Total # of trades			32					Percent profitable				91%
Number winning trades			29					Number losing trades				3
Largest winning trade			$ 5.16					Largest losing trade				$ -1.53
Average winning trade			$ 2.15					Average losing trade				$ -0.83
Ratio avg win/avg loss			2.60					Avg trade(win & loss)				$ 1.87
Max consec. winners			19					Max consec. losers				1
Avg # bars in winners			3					Avg # bars in losers				11
Max intraday drawdown			$ -12.83
Profit factor			25.14					Max # contracts held				1
Account size required			$ 12.83					Return on account				466%
Asset:
Buy:		Sell:				Total bars =>			791
Price:	Date:	Price:		Date:	P/L:	Total:	B&H:		Bars:	Net Comm:	10,000
31.69	04/03/92	32.19		04/03/92	1.6%	1.6%	1.6%		0	1.0%	10,098
33.92	06/26/92	34.80		07/17/92	2.6%	4.2%	9.8%		21	3.0%	10,299
33.65	07/24/92	34.81		07/31/92	3.4%	7.8%	9.8%		7	5.9%	10,593
35.81	10/30/92	35.24		01/29/93	-1.6%	6.1%	11.2%		91	3.6%	10,364
42.04	07/09/93	43.45		07/23/93	3.4%	9.6%	37.1%		14	6.5%	10,652
45.72	11/12/93	45.34		01/07/94	-0.8%	8.7%	43.1%		56	5.0%	10,505
44.45	02/18/94	45.37		03/18/94	2.1%	11.0%	43.2%		28	6.6%	10,663
43.89	04/01/94	45.05		04/15/94	2.7%	13.9%	42.2%		14	8.9%	10,886
43.39	05/06/94	44.89		06/10/94	3.4%	17.9%	41.6%		35	12.0%	11,200
43.34	06/17/94	44.30		07/15/94	2.2%	20.4%	39.8%		28	13.9%	11,386
42.82	07/29/94	44.63		08/05/94	4.2%	25.5%	40.8%		7	18.1%	11,808
42.69	08/05/94	43.17		10/28/94	1.1%	26.9%	36.2%		84	18.8%	11,881
42.20	11/11/94	43.79		11/25/94	3.8%	31.7%	38.2%		14	22.7%	12,267
42.02	11/25/94	43.90		12/02/94	4.5%	37.6%	38.5%		7	27.5%	12,755
45.76	04/07/95	47.14		04/28/95	3.0%	41.8%	48.8%		21	30.8%	13,080
46.81	06/23/95	48.66		07/21/95	3.9%	47.3%	53.5%		28	35.4%	13,536
47.17	08/18/95	48.93		09/01/95	3.7%	52.8%	54.4%		14	39.8%	13,981
48.05	10/20/95	49.08		11/17/95	2.1%	56.1%	54.9%		28	42.2%	14,219
54.54	05/10/96	57.75		05/17/96	5.9%	65.3%	82.2%		7	50.0%	14,997
57.81	07/19/96	59.80		08/09/96	3.4%	71.0%	88.7%		21	54.5%	15,453
57.36	08/16/96	59.71		08/23/96	4.1%	78.0%	88.4%		7	60.3%	16,026
63.76	12/06/96	66.00		12/20/96	3.5%	84.3%	108.3%		14	65.3%	16,531
64.70	02/28/97	67.71		03/14/97	4.7%	92.9%	113.7%		14	72.4%	17,241
65.64	04/04/97	67.96		05/02/97	3.5%	99.6%	114.4%		28	77.9%	17,789
80.53	10/31/97	84.63		11/07/97	5.1%	109.8%	167.1%		7	86.3%	18,635
80.58	11/28/97	79.04		02/20/98	-1.9%	105.8%	149.4%		84	82.2%	18,220
78.60	04/17/98	83.19		04/17/98	5.8%	117.8%	162.5%		0	92.2%	19,224
80.80	05/22/98	83.75		06/19/98	3.6%	125.8%	164.3%		28	98.6%	19,864
80.27	07/17/98	84.32		07/24/98	5.0%	137.2%	166.1%		7	108.1%	20,806
80.73	08/07/98	82.51		09/11/98	2.2%	142.4%	160.4%		35	112.1%	21,205
80.42	10/23/98	84.66		11/27/98	5.3%	155.2%	167.2%		35	122.6%	22,265
79.57	12/04/98	84.73		12/11/98	6.5%	171.7%	167.4%		7	136.5%	23,649