Designing Volatility Breakout Systems by Paolo Pezzutti
Interested in improving your systemís profit factor? Here are some suggestions.
The principle of range expansion/contraction was first studied and analyzed by Toby Crabel in Technical Analysis of STOCKS & COMMODITIES. According to
Crabel, the market oscillates between contractions and expansions. When the market moves between areas of equilibrium (the balance of supply and demand), it does so quickly through range expansion days. This forms the premise of volatility breakout systems. Since traders focus on these short-term range expansions rather than the longer-term trend, their goal should be to exploit some continuation of the movement after the
entry price to lock in profits.