V.12:7 (282-285): First-Hour Breakout System by Malcolm McNutt

First-Hour Breakout System by Malcolm McNutt

Here's a mechanical trading system for the Standard & Poor's 500 futures market.

New traders are often advised to find a method or technique with which to trade and then refine the method down to a set of rules and implement the method in the market of choice. Taking this to heart, I put together a mechanical trading system based on material presented by George Angell in Advanced Breakthroughs in Day Trading. This method was designed to trade the Standard & Poor's 500 futures market. In developing this system, hundreds of methods and thousands of computer iterations (if not more) were performed and 99% of the results were found to be inappropriate for trading. Ultimately, the trading system that I ended up with has proved to be reliable over a 1.5-year time frame, or 400 trades.

While this system may not prove to be reliable in the future, the rules and guidelines that I set out here should help you in your own research. Development of this system started by looking for ways to determine market direction. The most widely known systems use trend-following techniques such as moving averages.

Moving average systems catch large market moves, but profits are lost when the market contains no overall direction. The method of trading the S&P 500 futures market presented here is considered to be a trend-following system but is designed to eliminate a large number of losing trades during periods of nontrending market activity. Before I explain how to deal with a nontrending market, let me explain some basic rules.