Open Range Break - 100% Mechanical

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, and you would happily accept the deal and flip the coin until your thumb dropped. What if I told you that I had modified the weight distribution and aerodynamics of the coin so that it would land on tails 65% of the time? As a good statistician, you can quickly verbalize your expectations in your head and then realize that if you can maintain that payout rate, you'll keep giving up. Maybe, if you could, you'd build a robot to toss a coin for you? [hint, hint].

In the stock index futures market, I rely heavily on the opening range that forms after the opening of the RTH trading session, which is 9:30 ET. This is when liquidity floods into the market, trading volume is at its highest and most people are trying to get something done with the most money. I had never thought of this until yesterday, but why not see if this concept has any advantages in the Forex market? So I started manually backtesting the following strategies.

system

1. Draw a box around the first 5 minute bar after the New York open at 8am EST (I believe 12pm GMT), clearly defining the high and low of the bar. This is called the opening range (or OR for short).
2. Wait for the price to close on one side of the box, i.e. a close above the high of the first 5-minute bar or below the low of the first 5-minute bar.
3. If price closes above OR between 8am and 11am EST, enter a buy limit at the top of OR + spread + 0.5 pips. If the price closes below the OR, enter a sell limit - 0.5 pips at the bottom of the OR.
4. Wait for one of the following to happen:
   1. The closing price is the opposite of the OR of your trade. Exit the market and repeat step 3.
   2. Exit at a multiple of OR for profit.
      1. I only tested 2x, 3x, 4x, 5x and 10x multiples on EUR/USD. When you increase your multiplier, your win rate decreases but increases your overall net profit and expectations per trade.
      2. The return for the first 4 months of the year was 2x more than 36.0% with a risk of 2% per trade and a win rate of 51.05%.
      3. Returns in the first 4 months of the year for 3x multiples were 57.3% with 2% risk per trade and a win rate of 43.36%.
      4. The return for the first 4 months of the year at 4x Multiple was 79.8% with a risk of 2% per trade and a win rate of 37.06%.
      5. The return for the first 4 months of the year at 5x + was 150.5% with a risk of 2% per trade and a win rate of 35.66%.
      6. Returns in the first 4 months of the year for 10x + were 158.1% with 2% risk per trade and a win rate of 27.27%.
         1. These assumptions assume leverage in excess of 50:1, but no compounding : the position size remains consistent throughout the period. Position sizing is explained below

   3. If price does not close in the opposite direction of the OR and does not reach your multi-target, you will close the trade at 23:55 EST.

5. The only other rule is to enter no more than 5 transactions per day .

Position size

1. Position size is based on the size of the opening range. The math works out as follows:
   1. ((account size)*(risk %)) / (10 * or size)
   2. This creates consistent risk and reward across all trades, but there is a caveat as explained below.
      1. As you read in the stop loss exit procedure above, this method does not actually use a stop loss. It uses the closing price beyond the OR on the other side of the market. Usually the price will fluctuate by OR removing the stop loss. We don't want to be one of them. It significantly increases the number of transactions and reduces the edge.
      2. By using a closing price other than OR as a stop loss point, this clearly means that the risk is not limited to the size of the opening range defined above . Our risk is greater. So in theory it would be wise to use a risk half a percentage point lower than the normal comfort level.
      3. Most of the time when a trade is closed with a loss, it is just barely on the other side of the OR, within a pip or two. However, in some cases, using a closing price beyond the other side of the OR as a stop will force you to take a huge loss. Still, this is how I do my backtesting; maybe there's a better way.
         1. During my testing period, the maximum loss experienced was 52 pips. However, the average loss is 8 points and the median loss is only 6.4 points.

Comment

1. I only opened in New York and tested against EUR/USD only. Perhaps using the London open would be more profitable, especially for the GBP pair. Maybe it would be more profitable to use a wider range of tools. Maybe using some random candles would be more profitable - I don't know and don't have the time to manually backtest all these permutations. However, I think the conclusions I have reached deserve further research to achieve a 100% mechanical, profitable approach.
2. It took me about 5 minutes to sort out the logic of this method, and then started testing. There may be:
   1. A better way to manage your trades - I would say from my experience adding a trailing stop or BE stop will always reduce profits, lower expectations, but increase win rate. Maybe half close at 5x and the rest are set to close at the end of the day or at 10x...
   2. Better ways to enter - Sometimes the price takes off from the OR without any pullback and no opportunity to enter - these become huge wins but are missed because the orders are all pending orders at the OR.
   3. As things stand, it appears to be profitable. I wonder if this happens to other Geminis? Building a basket of mechanical management or breakout trades on a daily basis can yield huge gains, as shown above.

If anyone is interested in researching this further, especially developing an EA, I would be very interested in helping in any way I can.