Description
This trading idea presents a mechanical momentum breakout setup tailored for the FTSE MIB index (Italy 40 cash or futures), inspired by classic volatility breakout concepts popularized by Larry Williams. It uses the previous daily range to define dynamic entry thresholds around the prior close, with a "cap" to avoid entering during extreme volatility spikes. Additional filters from Williams' own tools (like %R for momentum) and volume confirmation help reduce false signals in ranging or low-conviction markets.The core philosophy: Markets often continue directional moves after a volatility expansion, but only when supported by strong momentum and increasing participation (volume). This variation adds asymmetry and filters for higher-quality trades, making it suitable for intraday or short-swing trading on lower timeframes (e.g., 15-min to 2-hours charts).
Key Calculations (Based on Daily Data)
Previous Daily Range: High_prev - Low_prev
Upper Threshold: Close_prev + 1 × Range (signals potential bullish expansion)
Upper Limit (Cap): Close_prev + K × Range (default K = 1.8; acts as a filter to skip overextended moves)
Lower Threshold: Close_prev - 1 × Range
Lower Limit (Cap): Close_prev - K × Range
These levels are projected onto the current day's intraday chart.
Entry Rules
Long Entry: Price closes above the Upper Threshold but below the Upper Limit. This captures moderate breakouts while avoiding entries in wildly overextended conditions.
Additional Filters:Williams %R (14-period on daily): > -20 (indicating strong bullish momentum, not overbought exhaustion)
Volume Confirmation: Rate of Change (ROC) on volume positive (e.g., increasing market participation compared to levels of 10 days ago).
Short Entry: Price closes below the Lower Threshold but above the Lower Limit.
Filters:Williams %R < -80 (strong bearish momentum)
Same volume ROC filter
Trades are typically taken intraday after the daily data is available (post previous close). Only one position per direction per day to avoid overtrading.
Risk Management & ExitsStop Loss:
- Longs: Below the previous daily low
- Shorts: Above the previous daily high
This uses the prior extreme as a natural invalidation point.
Take Profit: Fixed R-multiple target (e.g., 2.2R), where Risk = distance from entry to stop.
Alternative: Volatility-based (e.g., multiple of ATR for dynamic scaling).
Position Sizing: Risk a fixed % of capital per trade (e.g., 1%), often scaled with ATR for volatility adjustment.
Why This Works on Stocks?
Stocks can be volatile due to political/economic news, making range expansion signals potent in trending phases.
Filters help sidestep choppy sessions or low-volume periods.
Best in directional markets; avoid during major holidays or low-volatility summers.
Advantages
Simple, rule-based, and mechanical.
High reward-to-risk potential with filtered entries.
Combines classic volatility concepts with momentum/volume for edge.
Risks & Notes
Performs poorly in ranging markets (whipsaws).
Backtest on historical data and test in demo.
No holy grail – always use proper risk management. This is educational; not financial advice.
Feel free to adapt parameters (K, %R thresholds, R-ratio) based on your backtesting.
Share your results or variations in the comments!
This trading idea presents a mechanical momentum breakout setup tailored for the FTSE MIB index (Italy 40 cash or futures), inspired by classic volatility breakout concepts popularized by Larry Williams. It uses the previous daily range to define dynamic entry thresholds around the prior close, with a "cap" to avoid entering during extreme volatility spikes. Additional filters from Williams' own tools (like %R for momentum) and volume confirmation help reduce false signals in ranging or low-conviction markets.The core philosophy: Markets often continue directional moves after a volatility expansion, but only when supported by strong momentum and increasing participation (volume). This variation adds asymmetry and filters for higher-quality trades, making it suitable for intraday or short-swing trading on lower timeframes (e.g., 15-min to 2-hours charts).
Key Calculations (Based on Daily Data)
Previous Daily Range: High_prev - Low_prev
Upper Threshold: Close_prev + 1 × Range (signals potential bullish expansion)
Upper Limit (Cap): Close_prev + K × Range (default K = 1.8; acts as a filter to skip overextended moves)
Lower Threshold: Close_prev - 1 × Range
Lower Limit (Cap): Close_prev - K × Range
These levels are projected onto the current day's intraday chart.
Entry Rules
Long Entry: Price closes above the Upper Threshold but below the Upper Limit. This captures moderate breakouts while avoiding entries in wildly overextended conditions.
Additional Filters:Williams %R (14-period on daily): > -20 (indicating strong bullish momentum, not overbought exhaustion)
Volume Confirmation: Rate of Change (ROC) on volume positive (e.g., increasing market participation compared to levels of 10 days ago).
Short Entry: Price closes below the Lower Threshold but above the Lower Limit.
Filters:Williams %R < -80 (strong bearish momentum)
Same volume ROC filter
Trades are typically taken intraday after the daily data is available (post previous close). Only one position per direction per day to avoid overtrading.
Risk Management & ExitsStop Loss:
- Longs: Below the previous daily low
- Shorts: Above the previous daily high
This uses the prior extreme as a natural invalidation point.
Take Profit: Fixed R-multiple target (e.g., 2.2R), where Risk = distance from entry to stop.
Alternative: Volatility-based (e.g., multiple of ATR for dynamic scaling).
Position Sizing: Risk a fixed % of capital per trade (e.g., 1%), often scaled with ATR for volatility adjustment.
Why This Works on Stocks?
Stocks can be volatile due to political/economic news, making range expansion signals potent in trending phases.
Filters help sidestep choppy sessions or low-volume periods.
Best in directional markets; avoid during major holidays or low-volatility summers.
Advantages
Simple, rule-based, and mechanical.
High reward-to-risk potential with filtered entries.
Combines classic volatility concepts with momentum/volume for edge.
Risks & Notes
Performs poorly in ranging markets (whipsaws).
Backtest on historical data and test in demo.
No holy grail – always use proper risk management. This is educational; not financial advice.
Feel free to adapt parameters (K, %R thresholds, R-ratio) based on your backtesting.
Share your results or variations in the comments!
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