Mastering the LW Volatility Breakout Strategy by Larry Williams

This is Larry Williams, a professional trader who turned $10,000 into $1.1 million in just 12 months of trading, which is 11,300%! Now, if you’re like me, you’re thinking, how did he do it? Well, I decided to look for the answer to that specific question, scavenging the internet for the strategy he used to get those MASSIVE gains. And oh boy, did I find something. I found the exact trading strategy he used to make these gains. And I gotta say, Larry is an absolute genius for creating this because it works insanely well. And I’m gonna share it with you guys. Let’s get straight to it.

Understanding the LW Volatility Breakout Strategy

So, the strategy he used to make these gains is called the LW Volatility Breakout Strategy. LW stands for Larry Williams. Makes sense. This specific strategy revolves around one specific indicator, and that indicator is the Donchian Channels indicator. To add it to your chart, go to the indicators tab and type in “Donchian Channels.” Click this one right here. Now, the Donchian indicator by itself is nice, but in order for it to work just how we want it, we gotta change the settings. Go to the settings of the indicator and change the length to 96. Then, I’m also going to go to the styles tab and change the colors of the lines to red so they are easier to see. Also, something very important: all of these settings I’m about to tell you are specifically for the 5-minute time frame, as that is the time frame Larry used for this specific strategy. If you are going to be using a different time frame, please do your own testing with different indicator values.

Setting Up the Donchian Channels Indicator

So, this is what the Donchian indicator looks like by itself. There are going to be three lines. This middle line basically acts as a mean reversion point for the market, which means the price will always be naturally attracted to this line, almost like a magnet. You can also use it to tell the momentum of the chart. So, if the price is above the line, it’s bullish. If the price is below the line, it’s bearish. Next are the upper and lower bands. These bands can act as both supports and resistances, and oftentimes, the price will hit these and reject. But we can also use them as breakout points. If the price breaks this upper band, oftentimes the price will continue to head upwards, which is exactly how Larry used it. That’s a little foreshadowing.

Addressing the Strategy’s Major Problem

But there is a small problem with this strategy. Actually, it’s a pretty big problem. Let me explain. Normally, how you use this indicator is when the price breaks this upper band, you enter a long, set your stop loss right below the middle line, and set your take profit to something like a 2:1 risk-to-reward ratio, and you get a winning trade. BUT if the market is consolidating and moving sideways, this is when we start seeing some problems with the strategy. When the market is consolidating, the upper and lower bands are going to be really close together, which means they are a lot more likely to break even from a small move that doesn’t have a lot of momentum behind it. This would give you a false signal, and you would lose out on this trade. So, we need to find a way to stop this from happening so we only enter high-quality trades that have a lot of movement behind them.

Adding Confirmations to the Strategy

In order to do that, we need to add two more confirmations. But before that, [Ad]. So, the first confirmation indicator we are going to be adding is the LWTI, or the Larry Williams Large Trade Index. Go to the settings of the indicator and change the period to 25. The higher this number, the more long-term trends it will look for. If you are looking for confirmation for shorter-term trends, a smaller number is better. I found 25 works the best for the 5-minute time frame. Then change the smoothing period to 20. For the final indicator, add a simple volume indicator. I know, I know, pretty boring. But this will help us a ton with avoiding false signals! Go to the settings and change the MA length to 30. Then go to the style tab, enable the volume moving average, and change the color to white. This volume indicator will help us identify when the market actually has momentum behind it and not just a small move.

Executing the LW Volatility Breakout Strategy

The strategy itself is pretty simple, and I’m going to teach you how to do it. Then at the end, I’ll give you a secret trick to make it perform even better! First, make sure you’re on the 5-minute time frame. For a long trade, you want to do this:

Step 1: You want the price to come up and touch the upper red line. Once that happens, the next step is you want the LWTI indicator to be green. If it is red and touches the upper band, you would not enter the trade. Finally, you want the volume bars to be above the white line and also want them to be green, showing the market is not consolidating and there is enough volume to enter the trade. All three of these criteria need to be met in order for you to enter the trade. You would enter here. Now, the stop loss kind of depends on the setup. Usually, you would just set your stop loss right below the middle orange line. But there are some cases where you would not do that. For instance, when the upper band and the orange line have a huge gap, if you set your stop loss here, the stop loss would be huge. If this is the case, you would just set your stop loss at the recent swing low. Like this. Most of the time, you will be setting it right below the middle line though. Once you have set your stop loss, set your take profit at a 2:1 risk-to-reward ratio. And just like that, you have a profitable trade.

Executing Short Trades

Let’s do a short example, and then I’ll give you the secret trick to make this strategy even better. First, you want the price to hit this lower band. Check the LWTI indicator and make sure it is red. Then finally, you want the volume to be above the white line, and you want the bars to be red. Enter here. Set your stop loss right above the middle line and set your take profit at a 2:1 risk-to-reward ratio. And just like that, you have another winning trade.

The Secret Trick to Enhance the Strategy

Now, it’s time to go over the SECRET TRICK. Another small problem I found with this strategy is when it’s near a major support or resistance. For example, here all of our requirements were met. The price touched the upper band, the LWTI indicator is green, and the volume is above the line and also green. So, we entered our trade and set our normal take profit and stop loss. But if you look here, it was actually a losing trade. If we zoom out, you can see all of our criteria were met, but it was met right at a clear strong resistance level. So yeah, we got all of our signals, but since this was such a strong level, the price bounced here.

Pairing the Strategy with Support and Resistance

So, in order to fix this, you would go on a higher time frame like the 1-hour. Set all of your major support and resistance levels. Once you have them done, do not enter trades close to those major levels. So, in the trade I was talking about before, you would have just skipped this trade. Actually, what I found works really well is if the price is currently breaking a resistance level and then all of the indicator requirements are met, this would be a great trade to enter, as there is a ton of confluence and bullish momentum in this trade. So yeah, if you pair this strategy with basic support and resistances or even supply and demand, it works absolutely great. If you guys want to learn how to draw the perfect supply and demand zones for this strategy, watch this video, because I tell you specifically how to draw the best zones possible. Thanks for watching, and I’ll see you guys next time.