Jim Berg’s Truth About Volatility Trading System

I came across Jim Berg and his ATR system a long time ago when a user asked me to create a version of it for Sierra Chart.

The full system is described in “Stocks and Commodities” magazine February 2005 issue in an article called “The Truth About Volatility” by Jim Berg. Jim’s method caught attention in 2002 when he won a trading competition for Personal Investor Magazine. He had used the system to trade the Australian markets. It has been noted that Jim produced a 30% return during a year that the market had dropped 20%.

Note: The description below provides all the pieces of the system and how they fit together. It establishing market direction, timing entries, trailing stop and taking profits. You don’t have to use them together though. You might just take the one element and incorporate it into another strategy. For example, use the profit taking line for a different different system.

Also, note that the original system trades the daily charts. I have not tested this on intraday charts and smaller timeframes.

Lets continue.

Like most good trading systems it is not complicated and does not rely on too many indicators. The original system is long only though the version provided here also includes signals to the short side. The short being the same rules only in reverse.

The system as described by Jim is composed of two parts. The first part is related to establishing a trend. Once  the existence of a trend is established, the second part provides  the rules and framework for entering and exiting trades.

I will use the long side for what follows. Reverse everything for the short.

This is what the study looks like on Sierra Chart. I have set the parameters to show only the long side.

jim_berg_spy_daily

Part 1 – Establishing the Trend

This piece is not included in the studies / indicators. In the article, Jim explains that he simply uses a 34 moving average on a weekly chart. The rules for considering entry long are simple.

Looking at the weekly chart, see that:

  1. Price is making higher highs and higher lows.
  2. Closing prices are above the 34 week moving average
  3. When the 34 week moving average is pointing up.

Once we see that these hold, you can consider the trend established and up. You would then continue to part 2, which provides the rules for entry and exit.

Part 2 – Trading the Trend

After determining the trend on the weekly chart, we turn our attention to the daily chart on which we trade.

The study includes 3 visuals which provide the actual trading signals.

  1. Color bars – blue for bullish, red for bearish, black for neutral bars.
  2. A trailing stop
  3. A profit target

As the name of the article implies, all of the above 3 are based on volatility by means of an ATR.

So how does one trade?

First lets look at entries.

To enter long you first need to wait for oversold conditions to occur. Jim used a 7 day RSI. Obviously, any oscillator that shows oversold conditions would work. Using RSI for the example, when the oscillator goes below the 30 level, the market is considered oversold.

When the oscillator is oversold the bars will usually be either red or your default coloring – usually. In any case, after we get the oversold condition, we wait for the bars to turn blue meaning bullish. The next time we get a bar that closes blue, we can enter the market long.

Initial stop placement can be placed below a recent low. Once prices rise, we can trail our stop using the volatility stop.

Now lets look at exits. Exits are pretty simple. There are two rules to exit, one for profit and one uses the trailing stop. Whichever one comes first you take.

If we have a close above the profit taker line, we exit at the open of the next bar.

If we have two consecutive closes below the trailing stop, we exit at the open of the next bar.

Recap

  • System trades daily time frames
  • Long term trend is established using 34 day ma on the weekly chart
  • Enter on a pullback by looking at RSI or some other oscillator.
  • The bar colors signal that it is ok to enter – blue for long, red for short.
  • Initial stop below a previous low.
  • Trailing stop included in the study – start trailing as price advances.
  • If price closes above the profit taker line, exit on the open of the next bar.

References

Jim Berg docs for Sierra Chart