Bulletin 9 Messages From Members Regarding Volatility

The Traderclub Forum: Traders Club Bulletins: Bulletin 9 Messages From Members Regarding Volatility

David Elden (Admin) on Thursday, February 11, 1999 - 10:55 pm:

Chuck LeBeau's System Traders Club
BULLETIN Vol. 1 Number 9 Oct. 14, 1998

Table of Contents:


(Messages may be slightly edited in some cases. Names are used only when writer has given permission.)

Hello Chuck:

I guess we have all been thoroughly humbled by seeing our phenomenal bond profits evaporate while waiting for n day trailing stops to be hit. I've been doing some experiments to see how profits can be locked in when bonds behave like soybeans, and I have come up with some simple additions to the code for the systems which improve profits considerably. You might like to check these changes out.

One change is to add your volatility filter tip for the 7-11 Yen system to the code. For the Yen, add the entry condition: AvgTrueRange(2)<280 points. For Big Dipper: AvgTrueRange(1)<64 points.

A more significant improvement results from just adding the Trade Station % Trailing Stop to the systems as follows:

Big Dipper 10% with $6,000 floor.
25X25 15% with $5,000 floor (very good!).
Serendipity 15% with $1,500 floor.
7-11 Yen 15% with $6,000 floor.

The floors are large enough to render these stops ineffective other than in blow out moves, but they retain much of the profits in such moves. I haven't done any out of sample testing. I just optimized over 10/15/86 to 10/08/98 for everything. If you think it's worthwhile, pass it on to the Club members.

Best wishes,
Richard Sheeler

Regarding Special Bulletin on Volatility:

Thanks Chuck for this. Yes I also reduce size if volatility is up. You can miss winners but sooner or later you can suffer a huge hit which can undo months (years?) of good work. Fallout over the next week from hedge funds going sour (and having to unwind further) is going to be a real test of market levels and volatility. Your message was a good public service and timely reminder to all.


Greetings Chuck,

I'm watching the Dec Bonds this morning and it's painful to give up $6000.00 in profit as I watch the trade slip toward the losing column.
Have you tested any other exits for the 25X25 system that would protect some of the profits? As you can probably tell, I'm a hard-nosed system follower. I'm sure you know the game, as soon as the pain gets too high I exit a position prior to the exit stop and the market starts moving in a profitable direction again. I'm determined not to do that in this case. I think my trailing stop is around 126-10 on the Dec Bonds, that equates to about an 8,000.00 equity swing. A bit "stout" for my way of trading. I look forward to hearing your thoughts on the matter.


Regarding Special Bulletin

My approach is to make stops depend on "percentiles" of the recent true range. That is, you take the past 59 days' true range values and sort them from lowest to highest. The reason I use 59 is that the percentiles are easy to calculate. The nth value is the n/60th percentile. For example, the lowest true range is the 1/60th percentile and the highest true range is the 59/60th percentile. The median is the middle value, the 30th. The 90th percentile is the 54th value. So let's assume you want a stop that will only be hit 10 percent of the time and be missed 90 percent of the time. That's the 90th percentile, which is the 54th value in the list! If you're a little more gun-shy, take the 75th percentile, which is the 45th Value. If you're are real risk-lover, go for the 95th percentile, the 57th value. I think you want to use the true range rather than the high minus low because that accounts for overnight risk.
M. Edward Borasky) http://www.teleport.com/~znmeb
Comments from Chuck

The logic of the "25 X 25" exits is that if there is a sustained trend, the longer you hold the position the greater the profit should be. Holding for a minimum of 25 days or more, in times of normal volatility, seems to produce worthwhile profits most of the time and forces some badly needed patience which most traders seem to lack.
However, this logic is admittedly flawed when we get into periods of abnormal volatility. It is the amount of profit and not the duration of the trade that should always be our goal. The "25 X 25" system badly needs an additional exit so that when a particular level of profit has been reached the stop will tighten regardless of how many days in the trade. (Isn't hindsight wonderful.)

However it is important that we all remember that the huge open profits that existed in the recent trades were obtained only because smaller profits were not taken. You can't have big open profits if you make it a practice of taking small or medium sized profits. The trick is to give enough room at the beginning of a trade to let the open profits accumulate. Our strategy obviously did this very well. However the error was in not protecting those substantial open profits once they had been achieved.
I think we can improve the exit by simply adding a measure of profitability so that once that level has been reached we move the stops up regardless of the holding period. This would allow us to hold for an adequate period in normal markets yet it would also allow us to protect the big profits in the abnormal markets. I'll work on version 1.1 of the "25 X 25" system with this improved exit strategy and post it so all of you can download it. We will announce the completion and availability of the new version of this free system in a subsequent Bulletin.


Don't forget that I will be speaking at Dr. Van Tharp's Seminar October 23 -25 in Cary NC. near Raleigh. I will be seeing some of you there.
The Seminar is entitled " How to Develop a Winning Trading System that Fits You" (Advanced Workshop) As a special benefit to Traders Club Members, mention that you are a member of the Traders Club and receive a $150.00 discount on the cost of the Seminar. For enrollment information and details go to Dr. Tharps website at


In our next BULLETIN we will begin a series of articles about using Average True Range. I will be speaking on this topic at the 20th Annual TAG conference in Las Vegas November 21st, 22nd, and 23rd. I thought our Traders Club members might enjoy reading a preview of my lecture notes.

For information about the TAG conference (highly recommended) visit their web page at http:// www. telerateseminars.com