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Day Trading with Opening Range Breakout StrategiesChristian Lundströmwww.ChristianLundstrom.com

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Written for the Canadian Society of Technical Analysts

2013-08-12 Umeå, Sweden

3Who am I?

Christian LundströmCurrently:• PhD Candidate in Economics. Department of Economics, Umeå

University Sweden. Doctoral Thesis: On the Profitability of Technical Trading Rules

• Independent Consultant in Absolute Return Strategies, Fund Advisor. Folksam Bank.

Previously:• Chief Investment Officer, Fund Manager, Developer of Technical

Trading Rules for Asset Management. IIG AG, AB.

4Earlier Work

• Crabel, T. (1990): Day Trading With Short Term Price Patterns and Opening Range Breakout, Greenville, S.C.: Traders Press.

• Holmberg, U., C. Lönnbark, and C. Lundström (2013): ”Assessing the Profitability of Intraday Opening Range Breakout Strategies,” Finance Research Letters, 10, 27-33.

• Lundström, C. (2013): “Day Trading Profitability across Volatility States: Evidence of Intraday Momentum and Mean Reversion,” Working Paper. Umeå University.

• Williams, L. (1999): Long-Term Secrets to Short-Term Trading, John Wiley & Sons, Inc., Hoboken, New Jersey.

5Rationale

• The ORB strategy is based on the premise that if the price moves a certain percentage from the opening price level, the odds favor a continuation of that move until the closing price of that day. The ORB strategy suggests that long (short) positions are established at some predetermined price threshold a certain percentage above (below) the opening price, respectively. Crabel (1990).

• Profitability of the ORB strategy imply that the asset price must follow so-called intraday momentum at the price threshold levels, i.e., the tendency for rising asset prices to rise further and falling prices to keep falling, Holmberg et. al. (2013).

6Rationale

The Contraction-Expansion (C-E) principle: • The principle is based on the observation that daily price movements

seem to alternate between regimes of contraction and expansion, or, periods of modest and large price movements, respectively.

• In particular, the prices are characterized by intraday momentum during expansion days, whereas during contraction days, prices move randomly.

• As most days are contraction days an ORB strategy may be viewed as a strategy of identifying and profiting from days of price expansion and avoiding contraction days.

7Strategy

• Figure 1. An ORB strategy trader initiates a long position when the intraday price reaches and then closes the position at with a profit.

8Strategy

and where 𝜌>0

Thresholds in log, at day t, can generally be given as:

Strategy Returns in log, at day t, are hence given by:

and is the opening price at day t

9Strategy

• Where a, b, c are positive constants. x>1 denotes lagged x time periods. is the standard deviation of open-to-close returns.

Williams (1999)

, Crabel (1990)

, Holmberg et al (2013)

Thresholds in specific form varies among studies

Robustness?

10Strategy

• Probability Enhancing Filters (Trend and/or Volatility, the CE Principle)

• Crabel (1990); Inside days, NR(4), Hook Days, and more.

• Lundström (2013); Volatility Filters alone.

11Illustration

Empirical illustration from Lundström (2013)

Lundström, C. (2013): “Day Trading Profitability across Volatility States: Evidence of Intraday Momentum and Mean Reversion,” Working Paper. Umeå University.

12Illustration

• Robustness: Testing a vast number of thresholds• Filters: Testing the relation between volatility and the

strategy returns • Assessing the Profitability using a GLS specification:

13Illustration

Data: • Left: The daily closing prices in levels for crude oil futures adjusted for roll-over effects

from January 2, 1991 to January 26, 2011. Source: Commodity Systems Inc.• Right: The daily closing prices in levels for S&P 500 futures adjusted for roll-over effects

from January 2, 1991 to November 29, 2010. Source: Commodity Systems Inc.

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14Illustration

Table 1: Descriptive statistics for the price returns series

Asset Obs. Mean Std.Dev Min Max Skewness KurtosisCrude Oil 4845 0.0002 0.0077 -0.0606 0.0902 0.22 9.67S&P500 5018 0.0001 0.0093 -0.0912 0.0808 -0.06 11.73

Table 2: Descriptive statistics for the ORB strategy returns series for ρ=0.5 percentages

Asset Obs. Mean Std.Dev Min Max Skewness KurtosisCrude Oil 2827 0.0013 0.0072 -0.0100 0.0814 1.92 10.68S&P500 3314 0.0004 0.0081 -0.0100 0.0777 1.61 7.44

The ORB Strategy provide larger average return (Mean), as well as smaller average risk (Std.Dev)

15Illustration

Asset T freq. A pCrude Oil 0.5 2827 0.5670 0.0013 0.0000

1.0 1044 0.5814 0.0020 0.00001.5 423 0.6099 0.0027 0.00002.0 189 0.6667 0.0036 0.0001

ߩ (%)

S&P500 0.5 3314 0.4897 0.0004 0.00571.0 1572 0.5299 0.0006 0.02671.5 749 0.5220 0.0006 0.17552.0 368 0.5190 0.0006 0.4937

ߩ (%)

Table 3: Empirical results of the long-run ORB profitability test. The ρ is the per cent distance added and subtracted to the opening price. T is the number of trades. freq gives the proportion of trades that result in positive returns, while A gives the average returns. The p-values are calculated based on the HAC standard errors.

We find significant positive long-run profitability for some, or all, thresholds depending on the asset, and that the ORB strategy is a relative robust strategy w.r.t thresholds.

16Illustration

• Left: The strategy performance (in log prices starting with 100 USD) for crude oil futures

from January 2, 1991 to January 26, 2011. No costs or slippage.• Right: The strategy performance (in log prices starting with 100 USD) for S&P 500 futures

from January 2, 1991 to November 29, 2010. No costs or slippage.

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17Illustration

• Volatility determines the most of the results!

18Illustration

19Conclusion

• Day trading with opening range breakout strategies can generate value if

the cost is small enough (Crabel, 1990; Williams, 1999; Holmberg et al, 2013; Lundström, 2013)

• Lundström (2013) shows that the ORB profitability is linked to intraday volatility and there could be as much as 2 % differences in daily returns during high and low volatility states. Consequently, the ORB strategy should always be used in combination with volatility filters.

• Although not explicitly shown here, ORB returns are uncorrelated with other strategies such as long only as well as trend following strategies, CTA or Managed Futures.

20Future Research

• Testing ORB strategy returns for other filters than volatility • Volume probably matters, see Crabel (1990) • Intraday data to study intraday trends in prices

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• Thank you for listening!