V.7:3 (96-99): Testing breakout systems by Steve Notis

Testing breakout systems by Steve Notis

Breakout or volatility systems comprise a large portion of the current glut of publicly offered trading systems. Many of these systems sell for $3,000 or more. For that price you usually get a nice software package which will run optimizations on several variable parameters and give you a printout of the most profitable runs.

Whether you can make money using those parameters is an open question. Aside from the software, you are buying the system designer's logic, whether fully disclosed or proprietary, which is embedded in the software. You can adjust the input parameters to your heart's content but you cannot generally change the system's trading rules.

The core strategy of a breakout system is not new and has been previously described in books by J. Welles Wilder, Perry Kaufman and, most recently, by Larry Williams in his new book, The Definitive Guide To Futures Trading. Williams has developed a variation on the general theme which he calls his 75% system. The logic is very clean and simple—you determine the daily range on the S&P 500 futures contract for each of the past five days, you add the ranges together and then divide by five to get the average range of the past five days. Multiply the average range by 0.75 so that you have a number which represents 75% of the average five day range.