day trading with opening range breakout · pdf fileday trading with opening range breakout...
TRANSCRIPT
Day Trading with Opening
Range Breakout Strategies Christian Lundström, M.Sc www.ChristianLundstrom.com
1
Written for the Canadian
Society of Technical Analysts
2
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
3
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.
4
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).
5
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.
6
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.
7
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.
8
𝜓𝑡𝑢 = 𝑃𝑡 + 𝜌 and 𝜓𝑡
𝑙 = 𝑃𝑡 − 𝜌
𝜌 = 𝑎 + 𝑏
Illustration
Empirical illustration from Lundström (2013)
9
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.
10
0
20
40
60
80
100
120
140
160
180
200
19910102 19951010 20000726 20050519 20100702
Clo
sing p
rice
cru
de
oil
0
200
400
600
800
1000
1200
1400
1600
1800
2000
19910102 19950929 20000630 20050413 20100119
Clo
sing p
rice
S&
P5
00
Illustration
11
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.
13
4
4,5
5
5,5
6
6,5
7
7,5
8
199
101
01
199
201
24
199
302
22
199
403
21
199
504
18
199
605
15
199
706
12
199
807
10
199
908
06
200
009
06
200
110
08
200
211
06
200
312
05
200
501
07
200
602
06
200
703
08
200
804
03
200
905
04
Lo
g C
ap
ita
l G
row
th
B&H
ORB
4
4,2
4,4
4,6
4,8
5
5,2
5,4
5,6
5,8
199
101
01
199
203
03
199
305
04
199
407
06
199
509
06
199
611
05
199
801
08
199
903
15
200
005
15
200
107
18
200
209
25
200
311
26
200
502
01
200
604
05
200
706
11
200
808
12
200
910
14
Lo
g C
ap
ita
l G
row
th
B&H
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.
14
• Thank you for listening!
15