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Trading Strategies Revealed – “Opening Range Breakout” Review

Summary

Main parameters of Opening Range Breakout trading strategy performance at its non-optimized state: ROI -63.46%, Max. drawdown 64.29%.

Market behavior is not stable at overbought and oversold zones of Stochastic. (ROI increase -6% -> 2.5%, Drawdown reduction 65% -> 7%).

Post-optimization back-test results: ROI 129.71%, Max. drawdown 42.58%.

“Opening Range Breakout” is a popular trading strategy that uses first intra-day candle’s high-low range to identify the entry point upon its breakout.

We have conducted a detailed analysis and optimization of the “Opening Range Breakout strategy and according to the results of the study, we have determined the most effective indicators for use in this trading strategy. A brief overview of the study is presented below.

Initial back-test

To run a back-test we have coded a complete Opening Range Breakout trading strategy as a MetaTrader 4 Expert Advisor. During preliminary analysis we have identified that the best time frame for Opening Range Breakout trading strategy is 1 hour (H1). We have run a back-test of Opening Range Breakout strategy. For our test as a trade exit rule we have used a Trailing Stop of 30 pips which is launched after a trade has started and is modified each new 1 pip of profit. From our point of view, such approach allows to maximize profit and minimize drawdown.We have run the test for 2009.01.01-2019.12.26 using Every Tick modelling on EURUSD-H1, using 1:1 leverage, without reinvestment, assuming spread equals 10 ticks. These are the main parameters of Opening Range Breakout trading strategy performance at its non-optimized state:

ROI # of trades Winning ratio Max. drawdown
-63.46% 2846 33.66% 64.29%

Trading data analysis

After running the initial test of a simple non-filtered strategy we perform a trading data analysis that allows to identify possible filters to use to make the strategy more profitable reducing the drawdown simultaneously.The following charts may give some possible insights on which filters to apply (time sessions, day of week limitation, trend strength threshold, overbought/oversold conditions, volatility range) to turn this strategy profitable should you decide to use this strategy in your investment portfolio:

Optimization

Opening Range Brekout trading strategy can be used with other indicators to filter out losing trades and make entry signals more accurate. After analysing trading data we have found the following insights which have helped us to increase the profitability of Opening Range Brekout trading strategy and reduce it’s drawdown

  • Most trades that were opened at a boundary state of Stochastic were losing when trading “Opening Range Breakout” trading strategy during 2009 – 2019. Market behavior is not stable at overbought and oversold zones of Stochastic.(ROI increase -6% -> 2.5%, Drawdown reduction 65% -> 7%)
  • The most profitable trades were opened at the middle value of RVI when trading “Opening Range Breakout” trading strategy during 2009 – 2019. RVI measures the strength of a trend and it is unreasonable to take trades when trend is still not stable or when the current trend is at its final stage.(ROI increase -6% -> 1%, Drawdown reduction 65% -> 12%)
  • Trades that were opened at a boundary state of Demarker brought more losses when trading “Opening Range Breakout” trading strategy during 2009 – 2019. Demarker aims to assess the directional bias of the market.(ROI increase -6% -> -3%, Drawdown reduction 65% -> 31%)

Optimization results

We have analysed data received from a test of Opening Range Breakout trading strategy during 2009 — 2019 years and applied some filters such as Stochastic, RVI and Demarker. As a result, the profitability of the strategy has increased from -6.34% up to 1.34% and it’s drawdown has reduced from 64.29% to 5.17% using leverage 1:1.

Post-optimization back-test

Reducing the drawdown has allowed us to increase the leverage that can be used while trading this strategy up to 1:25, which in turn, has resulted in annualized ROI increase up to 33.59%!

Reducing the drawdown has also allowed us to use risk based lot calculation. Below you can see the back-test results using $10,000 initial balance and 3% risk per trade:

ROI # of trades Winning ratio Max. drawdown
129.71% 827 36.03% 42.58%

You can learn more about the results of analysis and optimization of the “Opening Range Breakout” strategy on our website.