Breakouts · Intermediate
Volatility breakout (Larry Williams)
Measure yesterday's range, add a fraction of it to today's open and buy if price gets there: a sudden expansion often keeps running.
Larry Williams, creator of the Williams %R indicator, won the 1987 World Cup Championship of Futures Trading with a return above 11,000%. One of his best-known ideas is the volatility breakout: when price moves far from the open quickly, it often continues in that direction for the day.
Why it works
A move of a large fraction of yesterday's range in a short time shows aggressive buying or selling. Instead of predicting, the system waits for that expansion and joins it.
Because the trigger depends on recent volatility, it adapts automatically to quiet and wild markets.
The rules
Setup
- Calculate yesterday's range: high − low.
- Choose a multiplier, typically between 0.5 and 1.0 (Williams often discussed values around 0.6).
Entry
- Buy stop at today's open + multiplier × yesterday's range.
- Sell stop at today's open − multiplier × yesterday's range (or only trade the side of the trend).
Stop loss
- A fixed fraction of the range on the other side of the entry, or a money stop sized to 1% of the account.
Exit and management
- Exit at the close of the day (or at the first profitable open, as Williams often did).
Filters that improve it
- Many versions only take longs above a long-term average and shorts below it.
Worked example
Illustrative example on the S&P 500: yesterday's range was 60 points and today opens at 5,400. With a 0.6 multiplier the buy stop is at 5,436 and the sell stop at 5,364. Price rallies through 5,436 at midday; the stop goes 30 points below at 5,406 and the trade is closed at 5,462 at the end of the session.
Illustrative numbers, not a recommendation.
Common mistakes
- Optimising the multiplier to fit the past perfectly: use a round value and test it on unseen data.
- Holding overnight a trade designed to last one day.
How to practise it
In Candlemind calculate the previous day's range with the day map (it shows yesterday's high and low), add a fraction to the session open and place a pending stop order there.
Pre-trade checklist
- Yesterday's range measured
- Trigger = open ± k × range (k 0.5–1.0)
- Trade in the trend direction
- Exit by the end of the day
Frequently asked questions
Who invented the volatility breakout?
It is most associated with Larry Williams, though similar ideas were used by other futures traders in the 1970s and 80s.
What multiplier should I use?
Values between 0.5 and 1.0 are common. A lower value gives more trades; a higher value fewer but stronger ones.