This article will evaluate one of the most successful strategies using trend following logic: the Opening Range Breakout (ORB).
This strategy, which will be applied to Ethereum, is based on the assumption that by reaching a certain threshold of gains of the underlying from the opening of the day (for example, 2.5% more), the market will continue in the direction it is going.
Sort of like wanting to enter the market only after showing some strength and therefore it is more likely that the direction of the trend will not change until the end of the day. The job of the systematic trader will be to identify the threshold beyond which this market tends not to reverse.
Figure 1 shows an example of the model in question, which identifies a percentage threshold from the day’s open above which the strategy will enter the market.
Trades will be closed at the end of each session, so this is an intraday strategy built on 15-minute bars, which will be tested over a period of approximately 5 years (August 2017 to present).
In figure 2, the rotation of the thresholds of 0% to 10% with steps of 0.5% (0 – 0.5 – 1 – 1.5 etc.) we see what are the percentages above which it is convenient to buy Ethereum. Obviously, the underlying rose so much in the years used for the backtest, and in any case, buying ETH would have shown a profit after 5 years. What varies is all other data, including drawdown and total number of transactions.
As the percentage increases, the strategy will trade less and less. This is obvious since the more the threshold increases, the more the difficulty of seeing a certain percentage of increase realized from the opening also increases. This means that the lower the applied percentage threshold, the higher the total number of transactions in the history.
Analysis of the results shows that the first values ranging from 0.5% to 3% are the ones that bring the most profit to the system. However, these percentages should be put into perspective with the average volatility of ETH, which is very high, especially compared to traditional markets. These thresholds are easily reached by the market, which implies a high number of transactions that could hide pitfalls. In fact, more transactions mean more fees to pay and more exposure to the risk of skidding.
The drawdowns are also very high (-$9,100 with 1%), considering that the position fixed for each trade is $10,000.
We therefore choose an intermediate value which can be a good compromise between the total number of trades (better to stay under 100/year and more than 20/year), average trade and drawdown. The 4.5% value seems the most suitable, since the drawdown figure is the lowest of all the cases considered and the average trade remains good for an intraday type strategy.
At this point, we proceed to enter the classic exits from the trade, namely the stop-loss and the take-profit. In addition to these exits, the long position will be closed if the market breaks the low of the previous session.
The optimal values for stop-loss and take-profit are 4% and 15% respectively. Basically, if prices fall 4% from the load price, positions will be closed in stop loss, while if the market rises by at least 15%, positions will be closed in take-profit.
The following figures show the results of the overall strategy of all the rules just listed. The profit curve is sloping upwards, and despite the fact that during the last period (2022) this market suffered very strong declines, of more than 80% (as shown in Figure 6), the strategy analyzed was able to remain moderate, reduce the risks simply by buy and hold ETH.
Finally, the levy does not exceed $3,000compared to a yield of over $19,000 during the period considered. A nice sum if we compare it to the capital fixed for each transaction, which amounts to $10,000.
In conclusion, this strategy has proven that it can be used profitably on the second most popular crypto in the world. Like other cryptocurrencies, Ethereum also responds very well to follow the trends logical, and the strategy on the breakout of the opening range corresponds very well to the nature of this market.
Until next time!