THE DYNAMIC BREAK OUT II STRATEGY
George Pruitt for Futures Magazine designed the original Dynamic Break Out
system in 1996. This version has done well since it was released for public con-
sumption in 1996. This version will be included in Appendix B. The newer
version of the Dynamic Break Out is just like the original, except we have
incorporated an additional adaptive filter.
The key to the Dynamic Break Out II system is its ability to adapt its
parameters to current market conditions. This system is based on the tried-
and-tested Donchian channel system. Remember how the Donchian system
works; buy when the high of the day penetrates the highest high price of x bars
back, and sell when the low of the day penetrates the lowest low of x bars back.
If you optimize the number of bars to determine your best entry and exit lev-
els, you will discover that different markets work better with different parame-
ters. You will also discover that a particular market goes through different
cycles and works better with different parameters through time. For example,
the Japanese Yen may have performed better with a look back of 40 days in the
1980s, but now works better with a look back of 20 days. That is the major
problem with using a static parameter for all markets. The Dynamic Break Out
II system allows the number of look back days to change with the current mar-
ket. Instead of using a static parameter, this system changes the parameters
based on an aspect of the current market.
Before you can use an adaptive parameter, you must come up with a func-
tion or adaptive engine that automatically changes the value of the once static
parameter. The input of this adaptive engine should be some form of market
statistic. In the case of the Dynamic Break Out II, we used market volatility.
When market volatility expands, so does the number of look back days in
our break out calculation. Increased market volatility usually equates to mar-
ket indecisiveness. By increasing the number of look back days when market