Open range breakout trading system pdf

Open range breakout trading system pdf

Posted: MFD Date: 23.06.2017

The goal of this research is to find various set-ups and exit strategies that could be used for trading the opening range breakouts. Our research is focused on a popular trading principle called the opening range breakout. We define that range as the first n-bars of minutes of a trading day.

The logic behind this is when the NYSE market opens we have the highest trading volume especially during the first 15 minutes of trading. What makes the opening range an important trading concept is like what we have said, the volume and the fact that traders act in response to recent news.

The fact that important economic news are often announced at Our analysis will show if this argument holds true. The aim is to identify possible set-ups and exits that can help us in improving the opening range breakout trading system.

The set-ups tested include volume spikes, time, and volatility. The tested entry and exit strategies will be analyzed and explained. How about price and volume? A very important indicator is volume. Therefore we must analyze the volume too and add it to our trading arsenal. The reason why you should use it is that high volume is an indication of high commitment to a position.

The opposite is also true, if the price increases on low volume it indicates that the price is likely to retrace. For the better understanding of the trading volume on a particular day we will use a Stochastic Volume Index Indicator compare the volume today with the volume of the last couple of trading days.

The current value is expressed as a percentage between the lowest and highest that it has been over the previous X number of bars. The numbers will be between 0 when at the lowest to when at the highest. We calculate the value by using the close of each bar.

When done correctly it should look like this:. When looking at the sample graph above you can already see why the opening range is so important.

The highest volume is between 9: Thereafter it dries up and we have one more spike right before the close of the trading session at Every day has the same game. To analyze the opening range breakout we have to understand the dynamics behind it. The assumption is that a gap-up day should further increase our confidence when trading the opening range. A gap-up tells us traders are already going long and we had a lot of unfilled orders the previous day which are executed at the opening.

This further underpins a bullish trend. The winning percentage is low but the Payout Ratio of 3. You remember what we tried to prove? Looking at our test results we are quite close.

Obviously the results can be improved by fine-tuning our exit technique. When we analyze the trading results by trading day of the month we have the strongest gains during the first week of the month. This is just our interpretation. What if we test only the breakout without the gap-up day?

Strategy rules are the same as above with the exemption that we do not need a gap-up day to enter the trade. The overall percentage comes down to The return percentage of Adding the market opening gap as an additional set-up for our trade entry improves the Kelly Pct.

When money management rules are applied to the trading strategy the final result of our alpha increases tremendously. Yes, the combination of set-ups can be endless and the process of successful system design is tiring. This is why you should use the above steps when developing your trading strategy and when trying to find a good set-up you should apply some common sense.

Opening Range Breakout Strategy Used By Popular Trader

Trading imbalances can occur which influences the breakout range of the next trading day. As mentioned before it is an important piece of the puzzle. Big volume underpins the strength of the trend. It confirms the price action. Make use of our indicator and try to find the optimal set-up for the market you are planning to trade. In addition to entries volume can also be used to identify the support and resistance points. For the following strategy test we will implement a more sophisticated exit technique.

The exit technique was originally developed for a fund managed by Tan LeBeau LLC. The exit strategy is based on the Average True Range. The idea behind it is to pick logical starting points and then add units of ATR to the starting point to produce a trailing stop that moves consistently higher adapting to changes in volatility.

It enables us to lock in the profit faster than with other trailing stop methods. Example of the strategy: After the trade has reached a profit target of at least one ATR or more, we pick a recent low point such as the lowest low of the last 15 bars.

Then we add some small unit of ATR 0. If we have been in the trade for 15 bars we multiply 0. The exit should be used after a minimum level of profitability is reached since this stop is moving very rapidly.

The ATR begins slow and moves up steadily each bar because we are adding one small unit of ATR for each bar in the trade. The starting point from which the stop is being calculated the 15 bars low in our example also moves up as long as the market is headed in the right direction. So now we have a constantly increasing number of units of ATR being added to a constantly rising day low.

It is important to emphasize that we are constantly adding to our acceleration for each bar to an upward moving starting point that produces a unique dual acceleration feature for this exit. We have a rising stop that is being accelerated by both time and price. When the trade makes a good profit run the ATR moves up very fast. A feature of the ATR is that you can start it at any point.

At a support level, trade entry or pick a low point as the lowest low of the last X bars. If you want to keep things simple you start the ATR Ratchet at something like 2 ATRs below the entry price which would make the starting point fixed.

In such a case the ATR Ratchet would move up only as the result of accumulating additional time. As a rule of thumb this exit technique should only be used after reaching a certain amount of profit. The length that we use to average the ranges is crucial, if we want the ATR to be highly responsive in an intraday trading strategy you should use a short length for the average.

There are many variations possible here. Best approach is to code the ATR Ratchet and plot it on a chart to get a feeling for its behavior. This will enable you to find the best possible variables. Now before we move onto strategy design we want to optimize the indicators first. A caveat here, avoid over optimization. When first looking at a solid set-up we take those values giving us solid results and with no jumps in data.

Now when we look at the results which values for our Indicator should we choose? This can be random and is pushing us right into the direction we do not want to go.

Now take a look again. What about the results from No. We choose a value somewhere in between which means No. Is this one the best possible answer? Again, finding the best possible one is over optimization. Our goal is to find a solid and consistent set-up with consistent results.

Opening Range Breakout Trading Strategy Design and Implementation - System Trader Success

We want to find the right cluster of possible variables and not an exact variable. In those cases start simple and just have a look at the chart and get a feeling for how the indicator behaves at different levels.

Trading is not an exact science like some traders want it to be and sometimes you need to follow your intuition and trust your experience. Here are the results after optimizing our Stochastic Volume Index indicator.

open range breakout trading system pdf

We use an Index value between 0 and 20 for the breakout and a lookback period of 86 bars min bar period. We are looking for a breakout during the opening range and a volume index level between 0 and 20 with a sudden price jump above the opening range for a bullish set-up.

open range breakout trading system pdf

We will also test the strategy for long entry on gap-up days. After defining those strategy rules we can implement the ATR Ratchet and further improve our results. There are many directions that can be taken for further development of this trading concept.

Optimizing parameters such as the ATR Ratchet is definitely an exit technique to be further studied and leaves room for improvement. It also shows that the exit of trading strategy is more important than the entry rules as our test results including the ATR Ratchet have shown. Further optimizations can be done by selecting the best entries and exits for certain days of the week and levels of volatility VIX. Notify me of followup comments via e-mail.

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When done correctly it should look like this: Volume As mentioned before it is an important piece of the puzzle. Exit ATR Ratchet For the following strategy test we will implement a more sophisticated exit technique. Parameter Optimization Now before we move onto strategy design we want to optimize the indicators first.

Our next step is fine-tuning the strategy and using the ATR Ratchet for the exit technique. Final Strategy Results Long Only: Further Research There are many directions that can be taken for further development of this trading concept. About the Author Nehemia Markovits. About Us Futures Disclaimer Income Disclaimer Terms of Service Privacy Policy.

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