Volatility Breakout Trading Explained

Oct 9, 2023

"Welcome to a fascinating journey into the world of trading with the Volatility Breakout Strategy – a method that offers you a glimpse into the wisdom of legendary trader Larry Williams. In this comprehensive guide, we'll unravel the strategy's intricacies step by step, giving you the tools to incorporate it into your own trading style.

Disclaimer: Before we dive in, a word of caution. This is not financial advice. It's designed for educational and entertainment purposes only. Your investment decisions should always be made with due diligence, and you bear the responsibility for any profits or losses incurred. Trade and invest wisely.

The Volatility Breakout Strategy

This time-tested strategy, crafted by the legendary Larry Williams, centers around the idea that trends tend to persist. In other words, what goes up often continues its ascent. The beauty of this strategy lies in its simplicity:

Strategy Breakdown:

Range Calculation: Begin by calculating the range, which is the difference between the daily high and low prices (Range = High - Low).

Base Price: Determine the base price or entry price for the next day. It's calculated as the previous day's candle close plus a constant multiplier (K) times the range. Typically, K hovers around 0.6 to account for market noise.

Entry Signal: If the current day's price surpasses the calculated base price, it's your signal to enter a position.

Exit: The following day, sell all your positions at the market's open price.

Let's Illustrate with an Example:

Consider an asset with a daily range of $100. Calculating the base price gives us $1020. If the asset's price surpasses $1020 on the second day, you buy and ride the momentum. On the third day, you sell all positions at the market open. If the price reaches $1100 on the third day, that's a remarkable 7.84% return. Even if it retraces to $1000 at the opening, you still incur only a 1.96% loss. This showcases not just an attractive risk/reward ratio but also a statistical edge thanks to following the trend.

Strengths of the Volatility Breakout Strategy:

This strategy's strengths lie in its ability to sidestep the emotional rollercoaster of market psychology. By focusing on volatility and executing short-term trades with precise entry and exit points, it enables traders to tune out market noise. Trends, which reflect market psychology, become our allies rather than foes. Unlike reversal strategies, this approach provides a statistical edge and an appealing risk/reward ratio.

Conclusion:

While applying this strategy directly in today's markets may require some adjustments, understanding how legendary traders like Larry Williams approached the market is invaluable. The key takeaway is to remove emotion from your trading equation, maintain strict rules, and define clear invalidation points. These principles are fundamental to finding success in the dynamic world of trading.

If you found this educational post insightful and engaging, don't forget to hit that like button and follow for more high-quality content. Feel free to share your thoughts and questions below—let's navigate the exciting world of trading together!"

Oct 10, 2023

Note

This chart is just for information

Never stop learning
I would also love to know your charts and views in the comment section.
Thank you

Oct 11, 2023

Note

"Squid Game, the sensational Netflix series that has taken the world by storm, offers a gripping mirror to human psychology, reflecting the intricate dance of emotions and decisions that we often encounter in the world of finance. Just as unsuspecting individuals are lured into the deadly games by the enigmatic subway stranger, many novice investors are drawn into the stock market by tales of friends striking it rich, often diving in headfirst without a hint of the rules of the game.

It's a rollercoaster ride from beginner's luck to the perilous cliffs of attribution bias. Beginner's luck, that elusive phenomenon where newcomers seem to outshine the experts, can be an enticing trap. It leads to overconfidence, a misplaced faith in gut feelings, and an overzealous desire to trade that often ends up costing a small fortune in fees. These overconfident traders become engrossed in their own world, neglecting the wisdom of statistics and putting all their eggs in a single, precarious basket.

Attribution bias, another insidious cognitive bias, rears its head as traders concoct explanations for their successes and failures. Profit? They're geniuses with uncanny foresight. Loss? Blame it on market conditions or mere bad luck. The mind constantly seeks excuses for every twist and turn.

Even great minds like Isaac Newton, who could unravel the mysteries of the cosmos, fell victim to the madness of financial markets, a glaring example of attribution bias in action.

In Squid Game, the players, after witnessing horrifying tragedies during 'Red Light Green Light,' are given a choice to continue playing or not. Overconfidence and attribution bias grip the survivors as they believe they are destined for victory, much like many traders who cling to the belief that improbable outcomes are within their grasp.

Mob psychology and the bandwagon effect rear their heads in the story, too. The players form alliances and teams based on earlier factions, mirroring the tendencies of investors to follow the crowd rather than adhere to their own strategies and analyses. Panic buying, selling frenzies, and susceptibility to pump-and-dump schemes ensue.

In the financial world, these psychological phenomena can lead us astray, costing us dearly. But unlike the brutal Squid Game, financial markets aren't a zero-sum game. With a solid understanding of market characteristics, rules, and diligent research, you can gain a statistical edge. As a trader, I'd argue that technical knowledge accounts for less than 5% of the equation; it's all about mastering your cognitive biases and maintaining emotional control.

So, just as the surviving players in Squid Game strive to outlast their competition, investors and traders should strive to outsmart their own psychological pitfalls. In the end, success in the market isn't about luck but about mastering the intricacies of the human mind in a complex financial world.

If you found this insightful, don't forget to like and follow for more quality content! Feel free to share your thoughts and questions below—let's navigate this financial journey together!"

This chart is inspired by Michael_Wang_Official