Got shaken out of the Opening Range Breakout trade

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Today, I logged in early again in an attempt to replicate my success with Opening Range Breakout yesterday. I found the opening move in State Bank Of India to be impressive, and went short with it. But my Initial Stop Loss was tight and got hit. I had wanted to keep a Stop-and-Reverse to long at that point, but did not have sufficient margin. Such potential early morning whipsaws are the reason why I was logging in late prior to yesterday.

Anyway, if I had stayed on with State Bank Of India, I would have ridden the second breakdown successfully, but that was not to be.

I was already into Hindalco. My 2 trades in Hindalco did not give me much.

After that, I was back to State Bank Of India. I thought that my late short in State Bank would help me get into profits, but that was not to be. Actually, I was in profit in that trade, but the wide Trailing Stop Loss required by the One Good Trade rule, prevented locking any profits in it.

Day Trading Price Action SBIN

Day Trading Price Action HINDALCO

>>> My live tweets of today's trades <<<

 

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Opening Range Breakout: One Great Trade covered yesterday's losses

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Finally, I got a One Good Trade. Today, I have more than recovered from yesterday's losses.

Trading the right scrip matters

Today was a metals day (I didn't check the other commodity charts). All of them, Hindalco, Vedanta, Jindal Steel, Tata Steel - all of them were on fire. Taking a Opening Range Breakout Long trade on any one of them would have made me rich.

That way, I was lucky that I chose to go with Hindalco today, instead of State Bank Of India or ICICI Bank. Also, kind of made my own luck, when I decided to switch from Nifty Futures to Stock Futures. Just look at the Nifty Futures chart today. There was no life in it.

On these Stock Futures, though the Day Trading Margin Requirements are higher, the brokerage and other costs are lower per unit of volatility, when compared to the Nifty Futures. An important thing to keep in mind is the volume/liquidity of individual Stock Futures. I am satisfied with the liquidity in the scrips that I have chosen to trade so far, though many times I could not get my entry orders filled for what could have been potentially good trades.

This trading style has been working so far. I guess that it will keep working.... until it stops working. The sun is shining right now... so make hay with this trading system.

Opening Range Breakout

Lately, I have been logging into my trading terminal a good 15-20 minutes after start of trading. It could be that I am just lazy, but I try to rationalize that due to the delay I avoid a number of early whipsaws. Today, I logged in early, just about 3 minutes after trading began.

Though I liked the look of both ICICI Bank and Tata Steel, I decided that I like the pattern on the Hindalco chart better. Hindalco had a good gap up and had higher volumes. That matches the kind of better Opening Range Breakout scenarios that I was evaluating earlier.

This one was a good Opening Range Breakout day, with no deep pullbacks that could take out my Trailing Stop Losses, and I only had to sit through it. The One Good Trade rule for my Trailing Stop Loss kept it wide enough.

From tomorrow, I will try to log in early into my trading terminal to catch similar trades, if possible. Especially, need to keep an eye on the gap ups and volumes at day open.

Day Trading Price Action Chart

>>> My live tweets of today's trades <<<

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Better Opening Range Breakout - the Overnight Gap setup

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In my earlier post about Opening Range Breakout, I had mentioned a very simple way to trade the Opening Range Breakout. It was a simple trading system, where upon completion of the ORB period,  entry triggers were placed above and below the Opening Range.

That system had a positive expectancy - both in backtests as well as real trades. I mainly tested and traded that system on Nifty50 futures. The issue with that system was that it was given to huge drawdowns. With optimizations, the win rate ranged between 20% to 30%, with a reward-risk ratio of 4:1 or more.

I have been testing Opening Range Breakout with different parameters, and one of the obvious tasks is to attempt to improve the win rate to minimize drawdowns. This process is still work-in-progress, but let me share one of my findings.

The tests were done on the NIfty50 Future data of the last 4 years. I find that if Opening Range Breakout trades are taken only when there is a significant overnight gap, with a few optimizations, the win rate jumps to between 50% and 55%, though the reward-risk ratio goes down to between 1.6 to 2.0.

Compare the 2 results:

System	My Old ORB System	ORB with overnight gap filter
Win Rate	20% to 30%	50% to 55%
Reward-Risk Ratio	4.0 to 6.0	1.6 to 2.0

I have given ranges for the Win Rates and Risk-Reward Ratio, but keep in mind that the Win Rates and Risk-Reward Ratios generally have a inverse relationship. So if I optimize the old system for a Win Rate of 20%, then the Risk-Reward Ratio would be closer to 6. Similarly, if I optimize the old system for a Win Rate of 30%, then the Risk-Reward Ratio would be closer to 4.

Which system would you choose? Applying the Kelly Criterion to maximize returns, the choice would generally be to go with the overnight gap filter.

While using the old ORB system, the Kelly Criterion would restrict the capital risked per trade to between 6% to 12%  and have an expected return of 2 to 10 times the initial capital per 100 trades. (The results that I got while trading the system were closer to 2 than 10). With the Overnight Gap filter, due to its higher win rate, the capital risked per trade according to the Kelly Criterion would be 15% or more, giving a minimum expected return of 25 times the initial capital per 100 trades.

But again, let me put the disclaimer. There are no minimums in trading. If you have the bad luck to hit a bad drawdown, or a big slippage, or makes typos, or go psycho... then there are no minimums... psycho gamblers especially have the talent of getting account balances below zero very quickly. Even ignoring all the bad luck and bad psychology, there is no guarantee that the market will continue to behave the way it did in the past to make Opening Range Breakout a successful Trading System. These are estimates based on past data, and not a prediction of the future performance.

Below, is an image on the how the ORB trades with overnight gap filter panned out on the November Nifty50 H1 charts. The Yellow bars indicate the days on which the setup occurred.

I have also found a few setups that can increase the expectancy of Opening Range Breakouts further... but the study is still in progress.

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Opening Range Breakout - Day Trading like a Swing Trader

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Opening Range Breakout or ORB Day Trading System is my perennial favorite. It is one of the simplest profitable Day Trading System that I have traded. It is a Day Trading System for the non-Day Trader, the busy executive who doesn't have much screen time, the Taxi Driver who places trades by phone without charts, and the student who doesn't bother about the intraday intrigues of the market.

I know because I was like them - place quick entry orders as soon as possible after Market Open, and scoot to work, and not bother about the market for the rest of the day. The result of the trade could be be checked at the end of the day anyway. And much to my surprise, money would keep coming - day by day, week by week, month by month... until the time disaster struck - like it always does.

Augubhai's ORB Trading System

Here are the basic steps of the system:

1. Define an Opening Range Period - 1 minute, 5 minutes, 30 minutes, or even a Range.
2. After Market Open, wait for the Opening Range Period to be completed.
3. Place Stop Loss Entry orders, at the High and Low of the Opening Range
4. That's about it... except for the exit. You get to set your own exit logic - If I was busy with work, I would try to wait for a few minutes for the entry to trigger on one side, and update the other order to place the Stop Loss at a calculated optimum value from the Entry Price. (For an Opening Range of 1 minute or 5 minutes, the entry usually triggered quickly. Else, canceled the orders, if the Opening Range was wide)

>>>  Click here for my latest post on Opening Range Breakout  <<<

There are a number of methods for trading Opening Range Breakouts, the most famous of them is perhaps Tony Crabel's formula. Many of these methods are for scalping the Breakout or booking profits at targets. My method is more a fire and forget for the day - with a wide calculated Stop Loss, targeting the maximum, but taking whatever the market gives - Day Trading with the attitude of a Swing Trader.

I had given an outline of the system on the Traderji forum, and am pasting that verbatim below:
 
http://www.traderji.com/amibroker/52959-augubhais-orb-system.html#post540835

To answer the queries above - this is a simple intraday ORB system. ORB stands for Opening range break-out. We decide on a period to watch - it could be the first 5, 10, 15, 30, 60 minutes - anything that you decide. Assuming that we decide that the opening range period is 10 minutes. At the end of 10 minutes, place a Buy Stop Loss order at the day's high(+filter), and a Sell Stop Loss order at the day's low(+filter). The filter need not be a big number, otherwise you could lose some part of a good move. If the Buy Stop Loss gets triggered, you could either decide to leave the the Sell Stop Loss unchanged or modify it to a fixed percentage or a trailing Stop Loss. It is up to you to decide on the stock, filter, and method of Stop Loss once you are in position. The premise is that we make the most profits during trending days. Generally, on trending days, the Open and Close are at near the extreme ends of the daily range, with minor pullbacks. So once you are in position, if you set your Stop Loss to avoid pullbacks, then you would get the most of a trending day with less risk. The key here is to decide on the Stop Loss. The Stop Loss will vary from stock to stock and period to period. The AFL will help you backtest and decide on the Stop Loss. With whatever backtest I have done, the maximum returns were when there was no stop loss. Obviously, that is more risky, and I never trade without a Stop Loss. This is not something new that I discovered. You will find so many ORB systems on the internet. What I want to share is that I have been profitably trading this system successfully for many years now - on NIFTY and recently on Bank Nifty. (Sometimes there have also been very serious whipsaws as well). This is an Intraday method that does not require any charts. You just need to know the day's high and low at the end of the opening range period. You also do not need any AFL, except for backtesting. Hope this answers your queries.

Rationale

The rationale for this system is already mentioned in the snippet above. It is to capture days when the open stays near one extreme (High or Low) of the daily candlestick bar. The number of such days, and the potential points to be made trading this system on such days is huge. Around 60-70% of the time, either the day's high or low is made within the first 60 minutes. If the Opening Range is 5 minutes, then this number reduces to around 20%, but you get to capture more points when you win (Don't take my word for it - Check these out on your charts, and see what's the percentage that you get. This is not very difficult to verify.)

Again, here's my post from Traderji:

http://www.traderji.com/day-trading/89936-opening-range-breakout-orb-intraday-trading-system.html#post867878

OK, here's the thinking behind my method of ORB... Open the daily chart. How many bars do you see that open at one end and close at the other end? If we capture even some of those bars, could we be in profit? I traded this mechanically, but if we are smart, we can get better results.

Warning

So, everything is hunky dory so far. But then comes the twist in the tale. You get to win only around 20% of the time. That means that for a random series of 100 trades, there is a 18.5% chance that you could have a continuous losing streak of 20 trades (Check this out with a Streak Calculator). Will you be able to handle this sort of a losing streak? I certainly cannot, at least not at this point - which is the reason that now I don't trade Opening Range Breakout the way it is described above.

Opening Range Breakout or ORB is my first and favorite Day Trading system. My first love. It is with ORB that I had my first Day Trading success - months of big profits, and then I was hooked. Then it all went bad in a few days - poor Money Management being a major reason. There is need to be aware of the risk of huge drawdowns trading the system mechanically as described above. Use it at your own risk.

Trading Systems

I am kicking off this series of posts on Trading System and Methods with my notes on Opening Range Breakout. These are just notes and not a comprehensive review. Maybe, I'll flesh out more details about this Trading System as I continue posting...

>>>  Click here for my latest post on Opening Range Breakout  <<<

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