From the October 01, 2012 issue of Futures Magazine • Subscribe!

Better breakouts in the electronic age

Point of reference

Although our search for a reliable filter came up short, this analysis helps us understand how reference point breakouts work. We can understand what a given filter accomplishes based on how it performs with both the perfect breakout test and a classic range-based reference point breakout.

The electronic markets have destroyed opening range breakouts for futures markets. Previously, markets were closed for 12 hours or more ,whereas now they are closed only for a few hours, if that (30 minutes for E-minis). This has, in turn, made the open ineffective. Although the close is a valuable reference point, it never worked as well as the open, which was a powerful reflection of overnight sentiment shifts because of various reports, such as inflation and unemployment. While the open has lost its significance for commodity futures, stocks still are sensitive to this price point. Although most stocks trade overnight, volume is light and for N.Y. Stock Exchange stocks, we still have a specialist involved in opening the stocks each day.

Almost all day-trading breakout methods exhibited peak equity in 2008. Using what we have learned, we can develop patterns that have performed more consistently over time in electronic markets. Our first pattern will test buys on daily bars so that we can take breakouts only in a predefined direction. We will look for profits before and after 2008 and for a strategy that works for both the E-mini S&P and the Nasdaq.

Here’s the system:

Sub AnotherBreakout(LB)

Dim BalancePoint As BarArray
Dim Mom As BarArray
Mom=Close-Average(Close,LB,0)

If Mom<0 Then 
Buy(“”,1,Close+Average(Max(Close[1]-Low,High-Close[1]),3,0),Stop,Day)
End If 

ExitLong(“”,””,1,0,CloseExit,Day)

End Sub

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