Robust Volatility Breakout Systems - Set and Forget + Free EA

Robust Volatility Breakout Systems - Set and Forget + Free EA

I have been a forex trader for 4 years now, profitable for 2.5 years, and I've been trading professionally for almost a year. Its the hardest thing I've ever done, but its been a really interesting journey. Although I've only been trading 4 years, I spent thousands of hours in front of the market until I knew I could make consistent money.

I began my trading journey as a discretionary trader, and I had a lot of success with the No Brainer Trades methodology. I still use it on higher timeframes. But a couple years ago I ran into TheRealThing, Joel Rensink, here on Forex Factory and it changed my perspective on trading. I taught myself how to program in TradeStation, spent hundreds of hours testing, and in the end I developed a basket of volatility breakout and trend following strategies I now use on the FX market. They are more robust than my discretionary trading was, and WAY less stress. I just pull the trigger over and over, no emotion, no fear, just execution. I've already tested it and know the concepts work, so there is nothing left but to trade it. My programs enter some of the trades but I'm always watching.

Volatility breakout and trend following strategies do better the more volatile the market becomes. They have worked for decades in the futures markets and worked great in all my backtests. I anticipate even greater success in the months and years to come as world markets become increasingly volatile and world governments engage in currency devaluation, massive debt monetization, and trade wars.

My strategies range from daily charts to 30 min, and I've decided to release a few strategies to the public. There should still be plenty of liquidity for all of us even if we all use them. They are all set and forget strategies that will only require a minimal time commitment, perfect for the part-time or aspiring trader. Professional traders looking for a simpler trading solution will also find them helpful, as well as discretionary traders looking for a trading system to smooth out their equity curve.

I also hope by doing this that I can prove a trading axiom that I have long believed; that success does not come to the high-born, the brightest, the fastest, the luckiest, or the prettiest, rather success comes to the one who applies an edge with consistence and diligence. Good poker players work off the same philosophy; they know their edge, and now their goal is to burn enough hands to let their edge express itself.

~Daedalus

The Patsy Principle

There are thousands of markets in the world, from FX to options to stocks to weather futures to debt instruments. How do we decide which market provides the best edge, and how do we exploit that edge?

We employ what I affectionately call the "Patsy Principle". Poker players have this saying, "There's a patsy at every table, and if you don't know who the patsy is, then you're the patsy!" Mathematically stated, the Patsy Principle states that the tradable edge of a market is directly proportional to the ratio of losers to winners. This means that the more losers a market has, the more opportunities there are to win, because trading is a zero-sum game.

The Forex market is unique because everyone in the world is either a willing or unwilling participant. Even someone who only has a savings account has placed a Forex trade by choosing to hold a certain currency. And those billions of people around the world are the patsies in the Forex market. By participating in that market without knowledge or understanding, they provide liquidity (i.e. cannon fodder) for the rest of us who do understand what is going on and profit from it.

The other losers in the Forex market are world governments that try to manipulate their money supplies in order to achieve policy goals. Whether it backfires or works out it create trends. And it is these trends in the market which give us our strongest edge. If we can obtain a tight entry in a trending market, our profits are exponential and potentially infinite. And it is this principle, INFINITE YIELD, which is the best edge that exists. Forex is the best market, and my strategies are designed to profit from it.

~Daedalus

Let me tell you about the worst trade I never took. In the summer of 2009 the Swiss National Bank was trying to hold the EURCHF above 1.5000 and they would intervene whenever it came close. They intervened about 4 times. I placed a sell stop on 1.4999 figuring that if it traded to that level then the SNB had thrown in the towel and the pair would collapse. I had a 20 pip stop on it and no plans to take profit because it was a long term trade idea.

At the last minute I cancelled the trade because some other traders said it was a bad idea and I got cold feet. The trade idea worked out beautifully. It collapsed through that level and never looked back. If I had still been holding that position today, I would be up 2150 pips, and ~ $42,000 on a $400 risk. This was when the idea of infinite yield began to hit home to me.

Tight entries + big runs = big profits.

The one thing that traders must be good at is calculating mathematical odds to apply the best edge they can. You want an edge that returns the most per dollar risked. What are the profit factors of the following edges and which one is best?

A. 60% chance of winning 1X risk
B. 50% chance of winning 1.5x risk
C. 30% chance of winning 5X risk
D. 20% chance of winning 9X risk

So the answers are as follows:

A. 1.5 PF
B. 1.5 PF
C. 2.14 PF
D. 2.25 PF

So the correct answer is D. For every dollar risked, it returns 2.25 dollars and provides the best edge.

Here are the top 5 ways to tell if a Forex trading company is legit.

1. They are professional traders. How can you make a living off it if they're not?

2. You have to sign a non-disclosure agreement to buy the strategy code. If it is good, they would want to keep it a secret.

3. Reproducible backtests that take into account commissions and slippage. You should be able to plug the code in and get the same results.

4. They think long term. Pro traders are concerned with decades of success, not hours of it.

5. Finally, their strategies are positively impacted by market outliers, ensuring success for decades to come.

Hi Daedalus,
You'll find most people of FF use metatrader 4 as their platform. EAs for MT4 will sell better by far.

FF Community,

I'm back and decided to do a series on strategy coding and development. I decided to go to law school so I've been really busy but I'm going to try and make time to put out some ideas on how I develop profitable strategies and hear some suggestions from you. I was quoted $8000 - 10,000 per year to set up a CTA fund and do the accounting. A law degree would pay for itself in about 6 years because I could do my own compliance work and write my own prospectus. Plus I'd be a lawyer.

There was a question about why I prefer coding in TradeStation rather than MT4. The difference between the platforms is the difference between driving a 2013 BMW and a 1998 Ford F-150. The BMW is faster, much more user-friendly and can do everything from braking efficiently to guiding you to the nearest Taco Bell. The F-150 is cheap, good enough to get by, and anyone take it apart and put it back together.

I have used almost every major Forex broker out there and TradeStation beats all of them hands down for execution, platform, data, and testing capabilities. MT4 does not even come close. And everything is FREE with a $2000 Forex account. I just run the platform on a ForexVPS server and it takes the trades for me. No more waking up at 2:00 AM to place trades...I am so done with that.

Next post we will get into coding and I will show how to create a basic Donchian channel strategy with a trailing stop. It is remarkably robust on many markets and still beats out most of the glitzy Forex day trading robots out there.

I agree MT4 is an old dog with flees, but everyone still prefers it.

I started to code in cALGO - C# - You can use Visual studio ,etc. It will probably replace mt4 within the next year ( i'm hoping anyways.) A few brokers offer it live currently.

Tradestation is easylanuage right? looking forward to some samples!

True, many people still like MT4, and its a great basic platform for charting but horrible for coding. The execution algorithms are designed to protect brokers, not traders. There is so much manipulation of execution prices that its laughable. Tradestation executes instantly and accurately.

C# is ok, just depends what level you like to code at. My friend codes his strategies all the way down to the FIX protocol to make sure he has absolute control of where his orders are routed. That's great, and he's a master programmer, but I prefer the more pragmatic approach because I'm more interested in developing profitable strategies and making sure that my backtests are accurate on 1 minute granularity.

There is no middle ground between organic data collection programming that goes all the way to the FIX and programs like Tradestation which support EasyLanguage with a large object database and order handling logic built in to the platform. Either you code out the entire thing from scratch or you work within a simpler coding environment customized to trading. I experimented with coding using halfway programs in NinjaScript with NinjaTrader and some with MT4. Overall its a great platform for trigger-pullers and writing indicators but too complex for most traders who just want to automate some rules. Its easy to miss a line of code or punctuation that could leave you with a naked position because it didn't reverse correctly...

The only reason you wouldn't switch to Tradestation is if you can't come up with $2000 for an account...let's face it, if you can't scrape together $2000 for a trading account, quit trading for a couple months and go work at Taco Bell or McDonald's to save it up, haha.

I remember the old days before I learned to code, waking up at 2:00 AM and placing orders, setting alarms, missing trades...never again. Its so nice to be able to have your portfolio on a server executing dozens of orders all day every day while you just check it once in while to make sure position sizing is correct across all the accounts. Its a much better way to live. Plus the peace of mind knowing that the thousands of hours spent in research verify what you are doing and you don't have that nagging doubt in the back of your mind wondering whether your strategy is actually profitable or not. It really takes the emotion out of trading.

It is not exactly a strategy using tight entries though. Would you care to elaborate?

Barbossa,

True, classic Donchian channel trading has pretty broad stops. I trade it differently, as I will show. I've tested around a thousand concepts and I found about 50 that work, but only about 5 that I actually trade live. I found that very few mechanical strategies are profitable intraday unless they have tight stops and profits are allowed to run longer than a day. In every case without exception, increasing the holding time for profits increased the profitability of the strategy.

But with daily charts and higher, many more strategies are profitable that have a substantially higher win rate. I still prefer the intraday strategies because you get many more trades, resulting in a smoother equity curve because the edge has a greater chance of coming out with more trades taken. Even though the profit factors are similar, more money is made because "more hands are burned", to borrow a poker term.

This sounds good. can't wait to try it!

Yes, I agree with you on that. I also like the concept of "intraday" entries that are held for longer periods. I'm curious to see your entries on the Donchian system.

Best regards,
Barbossa

input:

AccountSize(100000), {size of trading account in dollars}
AcctRisk(.01), {% Risk per trade}
ATRMult(2), {Stop size in multiples of the average range}
EntryLength(40), {Trade on a break of the highest high or lowest low of X bars}
BarsBack(10); {number of bars to look back to calculate average range for stop size}


vars: BuyPx(0), SellPx(0), StopSize(0), Risk(0);

BuyPx = Highest(high, EntryLength); {buy point, in this case highest high of the last 40 bars, defined by EntryLength above}
SellPx = Lowest(Low, EntryLength); {sell point, in this case lowest low of the last 40 bars, defined by EntryLength above}
StopSize = Average(Range, BarsBack)*ATRMult; {sets the size of the stop loss, in this case it is the average range of the 10 bars multiplied by two}
Risk = accountsize*acctrisk; {Total risk per trade, in this case 100,000 x .01 = $1000}


Buy Risk/StopSize contracts next bar at buypx stop; {Buy condition}
Sellshort Risk/StopSize contracts next bar at sellpx stop; {Sell condition}

Setdollartrailing(Risk); {Trailing stoploss}

Here is the code for a basic Donchian Channel breakout. You can copy and paste it into a Tradestation EasyLanguage Editor and compile it, or another EasyLanguage editor. Then you can Insert Strategy on a daily chart of EURUSD and see how it works. I have included explanations of what each part of the code does in braces. You can also optimize it by right clicking on the chart with the strategy and selecting "Format Strategies", then click "Format".

The difference between my Donchian channel system and others is that I use a tighter ATR stop, and the original would exit when it hit a 10 day high or low in the opposite direction of the original trade.

J. Welles Wilder ("New Concepts in Technical Trading Systems") has one volatility trading strategy (http://www.oxfordstrat.com/trading-s...lles-wilder-1/). It is based on ATR multiples.

hxcjf thanks for the thread you've started. I'm now beginning to take some back testing from mt4 over to trade station and came across this thread. I'm attempting to find better robust optimazation from 2005-2014 and utilize the volatility of 2008 at best. I currently using an indi that is communicated through a framework software program I built separate from mt4, so the signals come in and i wait, It communicates w the platform so the idea of having an EA trade is what I'm most interested in atm. If you have time and can send a pm I'd appreciate it.