If I gave you a coin and every time you flipped heads, I would pay you $94.64, but every time you flipped tails, you would pay me $36.10, you would gladly accept the deal and flip that coin until your thumb fell off. What if I told you that I had modified the weight distribution and aerodynamics of the coin such that 65% of the time, it would land on tails. You could quickly rattle off the expectancy in your head as the brilliant statistician you are and come to the realization that, if you could maintain that payout ratio, you would continue to flip away. Perhaps, you would, if you could, build a robot to flip that coin for you? [Hint, hint].
In the index futures markets, I rely heavily on an open range that forms following the open of the RTH session, i.e. 9:30 EST. This is when liquidity pours into the market, volume is its highest, and the most people are trying to use the most money to accomplish something. I hadn't thought about it till yesterday, but why not see if there was any edge to that concept in the FX market. So I set about manually back testing the following strategy.
System
In the index futures markets, I rely heavily on an open range that forms following the open of the RTH session, i.e. 9:30 EST. This is when liquidity pours into the market, volume is its highest, and the most people are trying to use the most money to accomplish something. I hadn't thought about it till yesterday, but why not see if there was any edge to that concept in the FX market. So I set about manually back testing the following strategy.
System
- Draw a box around the first 5 minute bar after the NY open, 8am EST (12pm GMT, I believe), clearly defining the highs and lows of the bar. This will be called the Opening Range (OR, for short).
- Wait for price to close on one side of the this box, i.e. close above the high of the first 5 minute bar or below the low of the first 5 minute bar.
- Between the hours of 8am EST and 11am EST, if price closes above the OR, enter a buy limit at the top of the OR + spread+.5 pip. If price closes below the OR, enter a sell limit at the bottom of the OR - .5 pip.
- Wait for one of the following to occur:
- Price CLOSES on the opposite side of the OR from your trade. Exit at market and repeat step 3.
- Exit for profit at a multiple of the OR.
- I tested EUR/USD only, for a 2x, 3x, 4x, 5x, and 10x multiple. As you increase the multiple, you decrease your win rate, but increase your overall net profit and per trade expectancy.
- Return for the first 4 months of the year for a 2x multiple was 36.0% risking 2% per trade, with a 51.05% win rate.
- Return for the first 4 months of the year for a 3x multiple was 57.3% risking 2% per trade, with a 43.36% win rate.
- Return for the first 4 months of the year for a 4x multiple was 79.8% risking 2% per trade, with a 37.06% win rate.
- Return for the first 4 months of the year for a 5x multiple was 150.5% risking 2% per trade, with a 35.66% win rate.
- Return for the first 4 months of the year for a 10x multiple was 158.1% risking 2% per trade, with a 27.27% win rate.
- These assumptions assume more than 50:1 leverage, but NO COMPOUNDING: position sizing was consistent throughout the period. Position sizing is explained below
- If price does not close on the opposite side of the OR nor reach your multiple target, you will close the trade at the 23:55 EST.
- The only other rules is to enter no more than 5 trades per day.
Position Sizing
- Position sizing is based on the size of the opening range. The math is as follows:
- ((Account Size)*(Risk %)) / (10 * OR Size)
- This creates consistent risk and reward between all trades with the one caveat as mentioned below.
- As you read above in the stop loss exit procedures, this method doesn't actually use a stop. It uses a close beyond the opposite side of the OR at market. Often price wicks through the OR taking out stops. We don't want to be one of those. It adds to the number of trades significantly and reduces the edge.
- By using a close beyond the OR as the stop, this obviously means that are risk is not limited solely to the size of the opening range as defined above. Our risk is greater. So theoretically, it would be wise to use a risk that is half a % point less than your normal comfort level.
- Most of the time, when a trade closes for a loss, it is just barely on the other side of the OR, within a pip or two. However, using a close beyond the opposite side of the OR for a stop, in some instances, forces you to hold the trade to a large loss. Nonetheless, this is how I performed the back test; perhaps there is a better way.
- In my testing period, the largest loss experienced was 52 pips. The average loss, however, was 8 pips, and the median loss was only 6.4 pips.
Notes
- I tested this only on NY open and only on EUR/USD. Perhaps using London open would be more profitable, particularly for GBP pairs. Perhaps it would be more profitable on larger range instruments. Perhaps it would be more profitable using some random candle - I don't know and don't have the time to back test all these permutations manually. However, the findings I came up with I think warranted further investigation, for a 100% mechanical, profitable method.
- I put the logistics of this method together in about 5 minutes and then started testing. There could be:
- better ways of managing trades - I will say that in my experience, adding trailing stops, or BE stops has ALWAYS decreased profit, decreased expectancy, but increase win rate. Perhaps closing half at 5x multiple and setting the rest to BE to close at the end of the day or at 10x...
- better ways of entering - sometimes price took off from the OR without any pullback and no chance to enter - these all went on to be big wins, but were missed as orders were all pending orders at the OR.
- As it sits, it appears to be profitable. I wonder if it is on other pairs? Building a basket of mechanically managed OR break trades each day could produce massive gains as shown above.
If anybody had any interest in pursuing studying this further, particularly with the development of an EA, I'd be very interested to aid in any way I could.
Small disciplines repeated with consistency lead to great achievements.