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

Better breakouts in the electronic age

Noise study results

The next step is to examine the results of our study. We will conduct it on E-mini S&P 500 and E-mini Nasdaq 100 futures contracts. Again, this is a study only, not an actual trading system, because the methodology looks into the future to gather the necessary data.

Our research will help us define a better stretch formula based on the close and allow us to design better breakout filters. As a reference point, a perfect stretch is a breakout just one tick above the market movement in the other direction. We can use this model to create filters that allow us to find a breakout that moves further away from the balance point, both without retracement and with a defined exit. We also can use our analysis to model our noise factor.

Our study is conducted from Sept. 12, 1997, to Aug. 6, 2012. Results for the E-mini S&P 500 and Nasdaq 100 are shown in “Stretch studies” (below). Analysis shows that about 37% of the breakouts retrace by the end of the day below the offset plus noise factor. The average movement is a bit more than four points. The long and short sides are about even. Nasdaq results are similar except for the slight difference in the breakout, which holds above the entry point by the end of the day. If we adjust the holding period and exit at the close of the next day or even two to three days later, the dollar value in total profits does not increase. However, the average trade values increases because there are fewer average trades.

Click here for a more detailed analysis of the E-mini S&P 500 and E-mini Nasdaq 100 studies below.

We can attempt to find filters that will improve our results, but many do not work. Taking trades only during periods of high volatility does not help. Also, trading only when the range is greater than the average range over a defined period (such as 40) does not improve results. When we require extreme volatility, although the Nasdaq results improve some, we have too few trades to be confident in the results. Another non-performing filter is a simple counter-trend filter, such as buying only when the close is lower than some previous close or selling when the close is higher than some previous close. 

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