Day Trading with Opening

Range Breakout Strategies Christian Lundström, M.Sc www.ChristianLundstrom.com

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Written for the Canadian

Society of Technical Analysts

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2013-07-02 Umeå, Sweden

Who am I?

Christian Lundström, M.Sc Currently:

• Independent Trader

• PhD Candidate at the Department of Economics, Umeå University

Sweden

• Independent Consultant in Absolute Return Strategies, Folksam Bank

Previously:

• Chief Investment Officer, Fund Manager for IIG AG, AB

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Earlier Work

• Crabel, T. (1990): Day Trading With Short Term Price Patterns 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.

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Rationale

• 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).

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Rationale

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.

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Strategy

• Figure 1. An ORB strategy trader initiates a long position when the

intraday price reaches 𝜓𝑡𝑢 and then closes the position at 𝑃𝑡

𝑐 with a

profit.

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Strategy

• Where 𝑃𝑡 is the opening price at day t, and a and b are positive

constants. is the standard deviation of open-to-close returns.

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𝜓𝑡𝑢 = 𝑃𝑡 + 𝜌 and 𝜓𝑡

𝑙 = 𝑃𝑡 − 𝜌

𝜌 = 𝑎 + 𝑏

Illustration

Empirical illustration from Lundström (2013)

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𝜌 =

Illustration

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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0

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19910102 19951010 20000726 20050519 20100702

Clo

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Illustration

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Table 1: Descriptive statistics for the price returns series

Asset Obs. Mean Std.Dev Min Max Skewness Kurtosis

Crude Oil 4845 0.0002 0.0077 -0.0606 0.0902 0.22 9.67

S&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 Kurtosis

Crude Oil 2827 0.0013 0.0072 -0.0100 0.0814 1.92 10.68

S&P500 3314 0.0004 0.0081 -0.0100 0.0777 1.61 7.44

Larger average return (Mean), Smaller average risk (Std.Dev)

Illustration 12

Asset T freq. A p

Crude Oil 0.5 2827 0.5670 0.0013 0.0000

1.0 1044 0.5814 0.0020 0.0000

1.5 423 0.6099 0.0027 0.0000

2.0 189 0.6667 0.0036 0.0001

𝜌 (%)

S&P500 0.5 3314 0.4897 0.0004 0.0057

1.0 1572 0.5299 0.0006 0.0267

1.5 749 0.5220 0.0006 0.1755

2.0 368 0.5190 0.0006 0.4937

𝜌 (%)

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

Illustration

• 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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ORB

Conclusion

• Day trading with opening range breakout strategies can generate value if the cost is small enough (Crabel, 1990; 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.

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• Thank you for listening!

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