New High Breakout Over 21 days

A popular trading strategy among stock traders is to look for some sort of price breakout from current ranges or limits. For example, if a stock has been trading in between clearly defined resistance and support levels for the last few weeks and then it breaks through and close above the resistance level traders might buy or take a ‘long’ position in the stock, as illustrated in the chart below (click to enlarge).

Another way, which is easier, to determine price breakout is to look at the previous ‘n’ periods (for example 21 days) and wait for the price to make a new high within this period. When this happens, it is generally believed that there is renewed strength in the stock, and so traders would look to take a long position in the stock.

Once a long position has been taken, we could set the initial ‘stop loss’ level using the Average True Range indicator. The good thing about this indicator is that we could also use it to ‘trail’ the position as it starts to make a profit, and it also provide clear exit points for the position should the price start to come back down again. The chart below explains what I am trying to say in a much clearer way (click to enlarge).


Note that the ATR Trailing Stop indicator has 2 parameters which need to be defined (i) the time period and (ii) the multiplier. In this example, I have used 21 days as the time period and a multiplier of 2; I will refer to this indicator as ATR[21,2x].

Our system entry and exit rules are as follows.

System Rules for New High Breakout over 21 days:

• Open a long position in a stock when its price makes a new high over the last 21 trading days.
• Exit position in a stock when its price closes below the ATR[21,2x] trailing stop.

There are multiple parameters that could be varied in this system, including:

• Time period ‘n’ for measuring the breakout range (e.g. 10, 21, 50, 100, 200, etc.)
• Time frame of the chart: intraday, daily, weekly, monthly, quarterly or yearly
• The 2 parameters of the ATR Trailing Stop indicator

Instead of using the ATR indicator as the trailing stop, we could have used any other trailing stop indicator, such as other volatility-based stop loss, Count Back Lines, and Bear Range Exit just to name a few.

Changing any of these parameters could significantly affect the performance of the system. Therefore, it is important to determine the effects that each parameter have on the system in order to achieve the optimal performance.

I will discuss the performance of this particular system in a future post. Stay tuned!