Two-sided optimization for volatility-scaled breakout rules

Write entry, exit, and waiting together

A complete long-only switch can be written as two inequalities: buy when the distribution-adjusted quote exceeds the lowest price since the last sale by X percent, and sell when it falls below the highest price since the last purchase by Y percent. The mechanical-trading-system stays flat when neither condition holds.

That pair is the percent-from-extreme trigger. One historically searched pair of those percentages was a buy rise of 8 percent and a sell decline of 3.5 percent.

Stretch the rules with a volatility estimate

The same skeleton can replace constant X and Y with linear functions of a volatility estimate, so a larger estimate can raise the entry hurdle or shrink the exit distance. That replacement is a volatility-scaled-threshold.

The volatility estimate can be the fractional change between successive quotes, averaged over a day-count chosen by the same search. Entry and exit can further require the percentage break to hold for a consecutive-quote count, and that persistence-count can itself be a linear function of the same volatility estimate.

Used this way, volatility-position-sizing is applied before entry and throughout the position. It can refuse a new exposure or cut an open one when swings widen.

When a cash distribution falls between two quotes, a price factor built from the pre- and post-distribution quotes is applied so the volatility increment is not an artifact of the payout. That dividend-adjusted-volatility step keeps the measured fractional change on price action rather than the payout.

Retune one parameter at a time

A ten-parameter set can be searched by cycling through the parameters one at a time, retuning each until file payoff stops rising, and repeating the cycle until no parameter still moves. That sequential-parameter-search is the system-optimization used to lock the full set.

Each single parameter can be located with an increment search that steps by a delta, reverses and halves that delta when payoff worsens, and stops when the increment is small. A worked search needed ten payoff evaluations and seven distinct passes through the quote file.

Accept a fit only on a two-sided sample

Fitting the rules on a four-year window that contained no meaningful decline produced a 1987 sell that first printed on 9 October, confirmed on 16 October, and still filled only at the 19 October close under the fund's execution rules.

The same constructor later required the search sample to contain both a major advance and a major decline. Under that two-sided-sample rule, a 1979 to 1986 fit, cut off a year before the 1987 break, exited on 14 September, while a four-year fit on a more two-sided series had already exited on 17 August.