And the most reliable.
In this article, I’m going to discuss the “DISTANCE” element in my breakout model. (If you’re not yet familiar with my model for building breakout strategies fast, download this free ebook).
The “distance” is really the simplest part of the model. It is about calculating the entry level for our next breakout trade.
There are a lot of ways to compute this “distance”.
The most basic one is to use a multiple of Average True Range (ATR), which is a volatility indicator.
So, all we do is take the current volatility and place the next entry level as a multiple or fraction (which I call FRACT) of the current volatility.
LongBreakoutLevel_Distance = FRACT * ATR(20).
Now, as I said, this is the simplest way to calculate the “distance”.
But of course, in our hedge fund, we have come up with a lot of other ideas to calculate this important element. Some of the crazier ideas included using:
- The current day range,
- The distance between swings,
- The width of Bollinger Bands or other bands.
Of course, we had even more ideas than that (which I can’t remember right now) and some of them were truly complicated.
However, this is what our research uncovered:
The vast majority of strategies in the incubation period using an alternative ‘distance’ approach didn’t perform well.
And by incubation period I mean the entire year of 2018!
On the other hand, there was no issue with strategies using the “basic” ATR approach. These were mostly behaving according to expectations! And in alignment with the back-test report.
Naturally, I was a bit surprised seeing this.
I would expect some more sophisticated ‘distance’ approaches to give us an additional edge. Besides, my trading motto is “never do what everybody else seems to be doing, always try something new and different”.
But there are obvious expectations. Some approaches seem to be really “timeless”. Go figure :-)
Of course, I’m not going to argue with our research results.
If the simple FRACT * ATR(X) is the best way to go, so be it.
Besides, I had already been using it for a long time before we launched our hedge fund and started testing new and sometimes radical ideas.
So, this is one of the surprising winners of the year.
The simplest and most obvious one – yet still very powerful.
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