R&D Blog
Volatility Squeeze | Trading Strategy (Filter)
I. Trading Strategy
Developer: John Bollinger. Concept: Trend-following trading strategy based on volatility breakouts. Source: Bolliger, J. (2002). Bollinger on Bollinger Bands. New York: McGraw-Hill. Research Goal: Performance verification of the volatility squeeze pattern. Specification: Table 1. Results: Figure 1-2. Trade Filter: When volatility falls to historically low levels, the volatility squeeze pattern is identified (Definitions: Table 1). Trade Setup: Long Trades: Close[i − 1] > Upper_Band[i − 1]. Short Trades: Close[i − 1] < Lower_Band[i − 1]. Index: i ~ Current Bar. Trade Entry: Long Trades: A buy at open is placed after a bullish Setup. Short Trades: A sell at open is placed after a bearish Setup. Trade Exit: Table 1. Portfolio: 42 futures markets from four major market sectors (commodities, currencies, interest rates, and equity indexes). Data: 36 years since 1980. Testing Platform: MATLAB®.
II. Sensitivity Test
All 3-D charts are followed by 2-D contour charts for Profit Factor, Sharpe Ratio, Ulcer Performance Index, CAGR, Maximum Drawdown, Percent Profitable Trades, and Avg. Win / Avg. Loss Ratio. The final picture shows sensitivity of Equity Curve.
Tested Variables: Squeeze_Look_Back & Squeeze_Memory (Definitions: Table 1):
Figure 1 | Portfolio Performance (Inputs: Table 1; Commission & Slippage: $0).
| STRATEGY | SPECIFICATION | PARAMETERS |
| Auxiliary Variables: | MA(Close, MA_Length) is a simple moving average of the close price over a period of MA_Length. Std(MA_Length) is a standard deviation over a period of MA_Length. St_Dev is a number of standard deviations to include in the price envelope. Upper_Band[i] = MA[i] + St_Dev * Std[i] Lower_Band[i] = MA[i] − St_Dev * Std[i] BandWidth[i] = (Upper_Band[i] − Lower_Band[i]) / MA[i] Index: i ~ Current Bar. | MA_Length = 80; St_Dev = 2.0; |
| Setup: | Long Trades: Close[i − 1] > Upper_Band[i − 1]. Short Trades: Close[i − 1] < Lower_Band[i − 1]. Index: i ~ Current Bar. | |
| Filter: | New trades are accepted only during the volatility squeeze pattern. The pattern starts when BandWidth[Today] = min(BandWidth over a look back period defined by the variable Squeeze_Look_Back). The pattern ends after a fixed period from the start defined by the variable Squeeze_Memory. | Squeeze_Look_Back = [0, 1000], Step = 25; Squeeze_Memory= [25, 1000], Step = 25; |
| Entry: | Long Trades: A buy at the open is placed after a bullish Setup. Short Trades: A sell at the open is placed after a bearish Setup. | |
| Exit: | Trend Exit: Long Trades: A sell at the open is placed if Close[i − 1] < MA[i − 1]. Short Trades: A buy at the open is placed if Close[i − 1] > MA[i − 1]. Stop Loss Exit: ATR(ATR_Length) is the Average True Range over a period of ATR_Length. ATR_Stop is a multiple of ATR(ATR_Length). Long Trades: A sell stop is placed at [Entry − ATR(ATR_Length) * ATR_Stop]. Short Trades: A buy stop is placed at [Entry + ATR(ATR_Length) * ATR_Stop]. | ATR_Length = 20; ATR_Stop = 6; |
| Sensitivity Test: | Squeeze_Look_Back = [0, 1000], Step = 25 bars Squeeze_Memory = [25, 1000], Step = 25 bars | |
| Position Sizing: | Initial_Capital = $1,000,000 Fixed_Fractional = 1% Portfolio = 42 US Futures ATR_Stop = 6 (ATR ~ Average True Range) ATR_Length = 20 | |
| Data: | 42 futures markets; 36 years (1980/01/01−2016/02/29) |
Table 1 | Specification: Trading Strategy.
III. Sensitivity Test with Commission & Slippage
Tested Variables: Squeeze_Look_Back & Squeeze_Memory (Definitions: Table 1):
Figure 2 | Portfolio Performance (Inputs: Table 1; Commission & Slippage: $100 Round Turn).
IV. Rating: Volatility Squeeze | Trading Strategy
A/B/C/D
V. Summary
The volatility squeeze filter does not improve the simple trend-following model based on Bollinger Bands. This can be observed in Figure 1-2: When Squeeze_Look_Back = 0 and Squeeze_Memory = 1000, all trades are accepted without any filtering.
Related Entries: Bollinger Bands – Momentum Model (Setup)
Related Topics: (Public) Trading Strategies
CFTC RULE 4.41: HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
RISK DISCLOSURE: U.S. GOVERNMENT REQUIRED DISCLAIMER | CFTC RULE 4.41
Codes: matlab/bollinger/volatility-squeeze/