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1999issue C101-6

Evaluating a long-only breakout system with a volatility stop

A long-only Breakout system can be evaluated as one procedure when the entry is a weekly breakout and the exit is a Volatility stop, so the loss bound scales with recent range rather than a fixed price offset.

  • A long Volatility stop is the entry-bar close minus a chosen multiple of a four-bar average true range, so the exit distance follows recent range.
  • After it is set, the long stop may rise or hold sideways but is not allowed to fall unless the bar low penetrates it.
  • The evaluated Breakout system enters on a stop at the current week high plus one tick only when that week close is above a 12-week exponential moving average, then exits on the Volatility stop.
  • The same four-period construction can be used in other time frames, but stop width is sensitive to the traded series.
Entries in this reading3 entries
Breakout system1 readingATR position sizing4 readingsCurrent trackVolatility stop12 readings

What the archive evaluates

The archive evaluates a complete long-only procedure rather than an isolated entry rule. A Breakout system places the entry, and a Volatility stop sets the exit so that the distance from price to the stop follows recent range.

How the Volatility stop is formed

A long Volatility stop is formed from the entry bar close minus a chosen multiple of a four-bar average true range. The exit distance therefore scales with recent range rather than a fixed price offset.

True range is the greatest of the current bar high-low, the current high versus the prior close, or the current low versus the prior close. Overnight gaps are counted in the volatility measure used by the stop.

The stop is not allowed to loosen

Once a long Volatility stop is set, it is allowed to rise or hold sideways but not to fall unless the bar low penetrates it. That construction keeps the loss bound from loosening after entry.

The long-only breakout procedure

The evaluated long-only procedure enters on a stop at the current week high plus one tick only when that week close is above a 12-week exponential moving average of closes. It then exits on the Volatility stop.

Other time frames and the short side

The same four-week lookback and sell-stop construction can be applied in other time frames. A short-side buy-stop would sit a multiple of average true range above the close and must not rise unless the prior bar high penetrates it.

Stop width depends on the series

On the tested home-finance sector series, a 3.5 to 4.0 average-true-range multiplier sat at a local peak while the 2 to 3 multiplier band remained profitable. The archive result shows that stop width is sensitive to the traded series.

Best Buy weekly price and trailing volatility stop, 1996–1997

A trader can see Best Buy fall from about $5.50 to a $2.20-area low and then run to about $7.40, with the long volatility stop holding under the 1997 advance instead of using a fixed dollar offset. Closes and stop levels were read from the weekly TradeStation pane in the source figure (header dated 16 July 1999).
A trader can see Best Buy fall from about $5.50 to a $2.20-area low and then run to about $7.40, with the long volatility stop holding under the 1997 advance instead of using a fixed dollar offset. Closes and stop levels were read from the weekly TradeStation pane in the source figure (header dated 16 July 1999).Best Buy · weekly · 1996-05-01T00:00:00.000Z to 1997-11-30T00:00:00.000Z

Vakkur used a four-week average true range and would not let the long sell-stop ease unless the weekly low took it out. The visible pane is May 1996–November 1997; his tabulated Best Buy test ran January 1990–November 1998. Prices are approximate to about $0.10–0.20 because they were read from a coarse screenshot.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
5 of 12 in the Volatility stop track
19991-4 pp.Next on Volatility stopWhen markets burst, not trendAcross the studied Standard & Poor's 500 calendar years from 1983 through 1998, an average of 32 trading days, or 12.88 percent of a roughly 250-day year, accounted for all net vertical price change.
All readings on this track · 12 readings
  1. 1989A close-only volatility reverse bound to average true range
  2. 1992Equity-curve average as a live-capital gate
  3. 1992Constructing volatility-adaptive trailing stops
  4. 1993Constructing skew-adjusted volatility stops and pyramid size
  5. 1999Evaluating a long-only breakout system with a volatility stop
  6. 1999When markets burst, not trend
  7. 2005Building entry rules with ratchet volatility stops
  8. 2005Pricing entries, stops and exits in range units
  9. 2013Constructing asymmetric volatility bands for reversal, trend, and stops
  10. 2015Mark the stop, the target, and the invalidation line before entry
  11. 2019Bounding capital risk with phase-aware stops
  12. 2019Measure the Bollinger Bands touch before adding engulfing and a volatility stop
By fieldEntry and exit rules12 readingsBy year19995 readings
All 12 readings tagged Volatility stop
Also on Volatility stop5 readings
1989A close-only volatility reverse bound to average true rangeATR position sizing1993Constructing skew-adjusted volatility stops and pyramid sizeATR position sizing2002Constructing volatility stops from average true range and parabolic SARATR position sizing1992Constructing volatility-adaptive trailing stops1992Equity-curve average as a live-capital gate