Breakout systems try to capture trends by entering the market after price moves beyond a certain threshold, such as a previous high or low. This approach works well when price continues to move in the breakout’s direction, but it can lose money if price exceeds a breakout level briefly and quickly reverses — a "false breakout."

Entering breakout trades only during periods of increasing volatility can help minimize this drawback. This approach is more likely to lead to substantial and durable trends.

To illustrate this, we tested a Bollinger Band breakout system with and without a volatility filter designed to reduce false breakouts. A Monte Carlo simulation, which scrambles the order of individual trades, was used to better estimate how the filtered system might perform in real trading.