Timely Opening Range Breakout Strategy (TORB)

9 feb

Today, I’ll tell you about an amazing research study back from 2019 by a team of Taiwanese researchers, “Assessing the Profitability of Timely Opening Range Breakout on Index Futures Markets.”

Takeaway: The study's results are compelling. Implementing the TORB strategy yielded over 8% annual returns across the tested markets. Remarkably, the TAIEX index showcased a staggering 20.28% annual return. These numbers underline the potential of TORB in maximizing trading gains.

█ What is Open Range Breakout?
Open Range Breakout (ORB) is one of the simplest and safest strategies day traders use in a relatively low-volatility market. Opening Range means exactly just that. You check an asset's highest and lowest price in a certain time frame (usually 15 to 60 minutes) from the market's opening time.

These levels become your resistance and support that guide your trading plan for that day. Say if your chosen stock price goes higher than the highest level after the opening range; it indicates a bullish run for the day. Conversely, it indicates a bearish run if the price loses support in a downward trend.




█ Timely Opening Range Breakout Strategy
ORB has a certain set of challenges, especially for volatile markets. The Timely Open Range Breakout (TORB) strategy has been proposed in response to these challenges.

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 across various markets, including DJIA, S&P 500, NASDAQ, HSI, and TAIEX, the study by Yi-Cheng Tsai et al. demonstrates the effectiveness of this strategy.

The key lies in identifying the 'active hours' of the market, aligning 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 essential in identifying the most active hours for futures market trading.

PMMV provides a snapshot of the market's activity level at each minute of the trading day. PMVR is crucial for understanding the volatility or the degree of fluctuation in the market at each minute.

PMMV (Per-Minute Mean Volume) is calculated by averaging the trading volume in a one-minute interval over a specified number of trading days.

The graph shows that the German 40 is most active during the London opening and 30 minutes into the New York opening.


PMVR (Per-Minute Variance of Return) measures the variance of the one-minute returns, calculated as the logarithmic difference between the closing prices of one-minute intervals.

Using PMVR, the German 40 is most active during the London opening session and approximately one hour into the New York session.



█ 2. TORB Trading Rules:
Basic ORB trading rules are applied here.

Buying pressure dominates if the price moves above the resistance level, suggesting potential upward price movement. Conversely, selling pressure prevails if the price falls below the support level, indicating a possible downward trend.

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 time points: the beginning of the observed period, the end of the observed period (probe time), and the time of closing the position. The prices at these specific times determine the conditions for buying and selling​​.


█ 3. Data Sets:
The study utilized two main datasets for its experiments:

• Intraday Data of Five Futures Markets: This dataset includes one-minute intraday data of the E-mini futures of the DJIA, S&P 500, NASDAQ 100, HSI (Hong Kong), and TAIEX (Taiwan). The period covered ranges from 2001/2003 to 2013, providing a comprehensive overview of these markets over a decade.
  
• Transaction Data for TAIEX Index Futures: This dataset contains detailed transaction data for the TAIEX index futures, covering the period from 2006 to 2013. It analyzes the relationship between TORB signals and trader behavior in the Taiwanese market.
  

Interestingly, the research even considers the global financial crisis of 2007-2008, presenting test results for two sub-periods: before and after 2007. This approach ensures a thorough understanding of the strategy's performance across different market conditions​​.


█ Results and Analysis
1. TORB Profitability Test:
The TORB profitability test involved back-testing the strategy for the five futures markets.

DJIA, S&P, and NASDAQ results revealed that strategies with probe times in the early stages yielded significantly higher annual returns.

• DJIA: The results showed that TORB transactions decreased as the probe time moved away from the beginning of active hours. This implies that the strategy was most effective when applied close to market opening times.
  
• S&P and NASDAQ: Similar to the DJIA, these markets also showed that strategies with early-stage probe times earned higher annual returns.
  
• Additionally, the TAIEX results demonstrated that TORB strategies earned significantly higher returns with probe times of less than 200 minutes.
  

2. Impressive Returns:
The study's results are compelling. Implementing the TORB strategy yielded over 8% annual returns across the tested markets. Remarkably, the TAIEX index showcased a staggering 20.28% annual return. These numbers underline the potential of TORB in maximizing trading gains.

It also found that the best probing times were shorter in the U.S. markets and longer in Asian markets​​.

The research demonstrated that TORB strategies yielded consistently higher returns than traditional TRB (Trading Range Breakout) strategies, with no significant results in profitability tests for all TRB strategies across the five futures markets​​.

To provide a clear picture, here's a summary of the 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
  

The active hours, identified by peaks in PMMV and PMVR, played a crucial role in the strategy's success.

For instance, the E-mini DJIA showed peaks around 8:30 AM and 3:15 PM, coinciding with the opening and closing times of the underlying market. Similarly, peaks were observed for HSI around the opening, closing, and lunch break times.


█ Relationship Between TORB Signals and Trader Behavior
The study also examined the relationship 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 for institutional traders. The returns of the TORB strategies were positively related to the net buy positions of institutional traders both before and after the breakout.

This suggests that by following the TORB signals, one could trade in the same direction as institutional traders and obtain positive returns.

Specifically, the returns of the TORB strategies were significantly and positively related to foreign investment institutions, both before and after the breakout, indicating that TORB signals align 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 Mar. 2019.
  

-----------------
Disclaimer
*Our results are approximate. We encourage you to 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 securities. I will not accept liability for any loss or damage, including without limitation any loss of profit, which may arise directly or indirectly from the use of or reliance on such information.

All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, backtest, or individual's trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on evaluating their financial circumstances, investment objectives, risk tolerance, and liquidity needs.

My Scripts/Indicators/Ideas/Algos/Systems are only for educational purposes!