Today I am telling you about an amazing 2019 research study by a Taiwanese research team titled “Assessing the Profitability of a Timely Breakout of the Opening Range in Index Futures Markets.” Bring away: The results of the study are convincing. The implementation of the TORB strategy produced annual returns of over 8% in the tested markets. Notably, the TAIEX index produced an astounding annual return of 20.28%. These figures highlight TORB’s potential to maximize trading profits.
█ What is an open range breakout?
Open Range Breakout (ORB) is one of the easiest and safest strategies that day traders use in a market with relatively low volatility. Opening range means exactly that. You check the highest and lowest price of an asset in a specific period of time (usually 15 to 60 minutes) from the market opening time.
These levels become your resistance and support, guiding your trading plan for that day. Say if your chosen stock price rises above the high after the opening range; it indicates an uptrend for the day. Conversely, when price loses support in a downtrend, it indicates a downtrend.
█ Timely breakout strategy for the opening range
ORB faces a number of challenges, particularly in volatile markets. In response to these challenges, the Timely Open Range Breakout (TORB) strategy was proposed.
TORB leverages high-frequency intraday data and aligns trading strategies with the active hours of the underlying stock markets.
By analyzing one-minute intraday data from 2003 to 2013 in various markets including DJIA, S&P 500, NASDAQ, HSI and TAIEX, the study by Yi-Cheng Tsai et al. shows the effectiveness of this strategy.
The key is to identify the market's “active hours” and align them with the opening range of the underlying index.
█ 1. PMMV and PMVR:
The research paper introduces two critical variables for the TORB strategy: Per-Minute Mean Volume (PMMV) and Per-Minute Variance of Return (PMVR). These metrics are important for determining the most active hours for futures market trading.
PMMV provides a snapshot of market activity levels every minute of the trading day. PMVR is crucial for understanding the market's volatility, or the extent to which it fluctuates every minute.
PMMV (average volume per minute) is calculated by averaging the trading volume in a minute interval over a certain number of trading days.
The graph shows that the German 40 are most active during the opening in London and 30 minutes after the opening in New York.
PMVR (minute variance of returns) measures the variance of one-minute returns, calculated as the logarithmic difference between the closing prices of one-minute intervals.
With PMVR, the German 40 is most active during the London opening session and about an hour after the start of the New York session.
█ 2. TORB Trading Rules:
The basic ORB trading rules apply here.
When the price rises above the resistance level, buying pressure dominates, indicating a possible upward price movement. Conversely, selling pressure prevails when the price falls below the support level, indicating a possible downtrend.
These rules are applied within the active trading hours defined by the PMMV and PMVR metrics.
Buy Signal
Sell signal
The strategy also defines three key times: the beginning of the observed period, the end of the observed period (trial period) and the time of closing the position. The prices at these specific times determine the conditions for buying and selling.
█ 3. Records:
The study used two main data sets for its experiments:
- Intraday data from five futures markets: This dataset contains one-minute intraday data of DJIA, S&P 500, NASDAQ 100, HSI (Hong Kong), and TAIEX (Taiwan) E-mini futures. The period covered is from 2001/2003 to 2013 and provides a comprehensive overview of these markets over a decade.
- TAIEX Index Futures Transaction Details: This dataset contains detailed transaction data for the TAIEX index futures for the period from 2006 to 2013. It analyzes the relationship between TORB signals and trader behavior in the Taiwan market.
Interestingly, the study even takes into account the global financial crisis of 2007-2008 and presents test results for two sub-periods: before and after 2007. This approach ensures a comprehensive understanding of the strategy's performance under different market conditions.
█ Results and analysis
1. TORB profitability test:
The TORB profitability test included a backtest of the strategy for the five futures markets.
Results from DJIA, S&P and NASDAQ showed that strategies with early-stage test periods produced significantly higher annual returns.
- DJIA: The results showed that TORB transactions decreased as the check time moved further from the start of active hours. This means that the strategy was most effective when used close to market opening hours.
- S&P and NASDAQ: Similar to the DJIA, these markets also showed that strategies with early check times achieved higher annual returns.
- Additionally, TAIEX results showed that TORB strategies with check times of less than 200 minutes achieved significantly higher returns.
2. Impressive Returns:
The results of the study are convincing. The implementation of the TORB strategy produced annual returns of over 8% in the tested markets. Notably, the TAIEX index produced an astounding annual return of 20.28%. These figures highlight TORB’s potential to maximize trading profits.
It was also found that the best probing times were shorter in the US markets and longer in the Asian markets.
The research showed that TORB strategies consistently delivered higher returns than traditional trading range breakout (TRB) strategies, with no significant results in profitability tests for all TRB strategies across the five futures markets.
To provide a clear picture, here is a summary of daily returns for each market analyzed:
- E-Mini DJIA: See Table 1 from the research paper
- E-mini S&P: See Table 2 from the research paper
- E-mini NASDAQ and HSI: See Tables 3 and 4 from the research paper
- TAIEX: See Table 5 from the research paper
Active hours, identified by peaks in PMMV and PMVR, played a critical role in the success of the strategy.
For example, the E-mini DJIA showed peaks at 8:30 a.m. and 3:15 p.m., which coincided with the opening and closing times of the underlying market. Similarly, peaks in HSI were observed around opening, closing, and lunch break times.
█ Relationship between TORB signals and trader behavior
The study also examined the connection between TORB signals and trader behavior, particularly in the TAIEX futures market.
It was observed that the daily volume for individual traders was about twice that of institutional traders. The returns of TORB strategies were positively related to institutional traders' net long positions both before and after the outbreak.
This suggests that by following TORB signals, one could trade in the same direction as institutional traders and earn positive returns.
In particular, the returns of the TORB strategies were significantly and positively related to foreign investment institutions both before and after the outbreak, indicating that the TORB signals are consistent with the trading direction of the most informed traders in the Taiwan market.
█ reference
- Y.-C. Tsai, M.-E. Wu, J.-H. Syu, C.-L. Lei, C.-S. Wu, J.-M. Ho and C.-J. Wang, “Assessing the Profitability of Timely Opening Range Breakout on Index Futures Markets,” IEEE Access, vol. 7, pp. 32061–32071, March 2019.
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Disclaimer
*Our results are approximate. We recommend that you test the assumption yourself. We do not guarantee that you will get the same results. This is an educational study for entertainment purposes only.
The information in my scripts/indicators/ideas/algos/systems does not constitute financial advice or a solicitation to buy or sell any securities. I accept no liability for any loss or damage, including but not limited to, lost profits, arising directly or indirectly from the use or reliance on such information.
All investments involve risk and the past performance of any security, industry, sector, market, financial product, trading strategy, backtest or an individual's trading is not a guarantee of future results or returns. Investors are fully responsible for all investment decisions they make. Such decisions should be based solely on an assessment of their financial situation, investment objectives, risk tolerance and liquidity needs.
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