Failed range trades as breakout-system tests

A range campaign can treat a hit of the maximum-adverse-excursion stop as evidence that the range procedure has failed. A reverse breakout-system entry is then the next testable action.

Maximum-adverse-excursion is the largest move against a live position. It is used to decide when a range trade is no longer expected to recover and when a reverse should be considered. The stop-loss is a pre-placed loss bound that caps exposure on the range trade and can mark the reverse level for the breakout-system entry.

The reverse as a separate book

The breakout-system is a single testable procedure that enters when a prior range fails, holds for the system period, and also specifies when to stand aside.

The breakout-system book was treated as separately analyzed and separately capitalized. A separately-capitalized-campaign keeps the reverse as its own book instead of folding it into the original range system.

For the Treasury bond futures range rules under review, the reverse was not taken until 1500 dollars of adverse excursion had been risked.

What the plotted trades showed

December Treasury bond futures from 1986 through March 1992 produced 43 breakout-system trades, and 20 of those 43 never went adverse after entry.

Plotted breakout-system trades fell into three groups: no material adverse excursion, adverse excursion as large as 1.5 points, and little favorable movement followed by a sharp deterioration.

The largest favorable excursions clustered on trades that recorded no adverse excursion after entry. After the deteriorating and merely tolerated adverse-excursion groups were removed, remaining no-adverse trades still showed favorable excursion increasing with time in the trade.

Maximum-favorable-excursion is how far a breakout-system trade travels in the intended direction before a later loss. It is used to judge whether the reverse is still maturing. Trades that accepted adverse excursion of as much as 1.5 points did not advance far or promptly in the plotted sample.

Missed fills and sample size

During the test window a gap through the stop-loss blocked entry at the measured reverse level once. A practical stop-loss was described as a few ticks beyond the fill rather than a literal zero-loss order.

The sample stayed near 40 trades over six years, limiting generalization.