Finance Research Letters 10 (2013) 27–33

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Finance Research Letters

journal homepage: www.elsevier.com/locate/frl

Assessing the profitability of intraday opening range

breakout strategies
Ulf Holmberg, Carl Lönnbark, Christian Lundström ⇑
Department of Economics, Umeå School of Business and Economics, Umeå University, SE-901 87 Umeå, Sweden

a r t i c l e i n f o a b s t r a c t

Article history: Is it possible to beat the market by mechanical trading rules based
Received 2 July 2012 on historical and publicly known information? Such rules have
Accepted 1 September 2012 long been used by investors and in this paper, we test the success
Available online 12 September 2012
rate of trades and profitability of the Open Range Breakout (ORB)
strategy. An investor that trades on the ORB strategy seeks to iden-
JEL classification:
tify large intraday price movements and trades only when the price
C49
G11
moves beyond some predetermined threshold. We present an ORB
G14 strategy based on normally distributed returns to identify such
G17 days and find that our ORB trading strategy result in significantly
higher returns than zero as well as an increased success rate in
Keywords: relation to a fair game. The characteristics of such an approach over
Bootstrap conventional statistical tests is that it involves the joint distribu-
Crude oil futures
tion of low, high, open and close over a given time horizon.
Contraction–Expansion principle
Ó 2012 Elsevier Inc. All rights reserved.
Efficient market hypothesis
Martingales
Technical analysis

1. Introduction

The Efficient Market Hypothesis (EMH) of Fama (1965, 1970) asserts that current asset prices fully
reflect available information (see also Fama, 1991) implying that asset prices evolve as random walks
in time. Consequently, tests of the EMH have traditionally been designed to catch deviations from ran-
dom walk prices and in the massive literature on the subject one is bound to find support for both
acceptances and rejections of the hypothesis (e.g., Malkiel, 1996; Lo, 2001). In particular, an assertion
of the EMH is that it should not be possible to base a trading strategy on historical prices (so-called

⇑ Corresponding author. Fax: +46 90 772302.

E-mail address: [email protected] (C. Lundström).

1544-6123/$ - see front matter Ó 2012 Elsevier Inc. All rights reserved.
http://dx.doi.org/10.1016/j.frl.2012.09.001
28 U. Holmberg et al. / Finance Research Letters 10 (2013) 27–33

filter rules or technical trading) and earn positive expected returns. However, the fact remains that the
use of filter rules is a widespread phenomenon. Barclay Hedge estimates that filter based Hedge Funds
within the Managed Futures category manage over 300 Billion USD in 2011 and is today the largest
hedge fund category with respect to assets under management. Indeed, some filter rule traders appear
to consistently outperform the market (see Schwager (1989), for a classic reference) and the subject
has been given due attention in the literature (e.g. Brock et al., 1992; Gençay, 1996, 1998). Testing
of the profitability of trading rules has traditionally been carried out based on a (at least) daily invest-
ment horizon. However, as discussed in Taylor and Allen (1992) the use of filter rules among practi-
tioners appears to increase with the frequency of trading (see also Schulmeister, 2006, 2009). In
particular, many strategies are typically employed intraday and to assess their potential profitability
one would typically require intraday data. The relative unavailability of intraday data may thus be a
possible explanation for the apparent lagging behind of the research community.
In this paper we remove this obstacle and propose a quite novel approach on how to assess the
profitability when only records of daily high, low, opening and close are available. Obviously, there
is a plethora of filter rules out there and the one we have in mind in the present paper is the so-called
Opening Range Breakout (ORB), which is typically adopted intraday. This rule is based on the premise
that if the market moves a certain percentage from the opening price level, the odds favor a continu-
ation of that move. An ORB filter suggests that, long (short) positions are established at some prede-
termined price threshold a certain percentage above (below) the opening price.
To evoke the testing strategy and gain intuition on the way we first note that the rationale behind
using an ORB filter is the believe in so-called momentum in prices (e.g. Jegadeesh and Titman, 1993).
That is, the tendency for rising asset prices to rise further and falling prices to keep falling. In the
behavioral finance literature the appearance of momentum is often attributed to cognitive biases from
irrational investors such as investor herding, investor over- and under-reaction, and confirmation bias
(see Barberis et al., 1998; Daniel et al., 1998). However, as discussed in Crombez (2001) momentum
can also be observed with perfectly rational traders. In pioneering the ORB strategy Crabel (1990) pre-
sented the so-called Contraction–Expansion (C–E) principle. The principle asserts that markets alter-
nates between regimes of contraction and expansion, or, periods of modest and large price
movements, respectively. An ORB strategy may be viewed as a strategy of identifying and profiting
from days of expansion. In passing we note the resemblance with the stylized fact of volatility clus-
tering in financial return series (e.g. Engle, 1982).
Now, a seemingly quite reasonable assumption is that markets for the most part are relatively effi-
cient with prices evolving as random walks in time, or equivalently, returns are martingales. Thus, a
heuristic use of the law of large number implies normally distributed returns. According to the (C–E)
principle these calm days could be considered as periods of contraction during which the returns are
normally distributed. Now, during periods of expansions traders activates ORB strategies and the prof-
itability of them implies that the martingale property breaks down with non-normality as a conse-
quence. Building on this reasoning our testing strategy is simply based on identifying days of large
intraday movements and evaluating the expected return on these days. In particular, if on a given
day the price threshold implied by the rule is above (below) the high (low) price we deduce that a long
(short) position was established at some point during this day. To assess statistical significance we
build on Brock et al. (1992) and use a bootstrap approach adapted to the present case.
The remainder of the paper is organized as follows: In Section 2 we briefly review the underlying
theory and give an account of the ORB strategy. In this section we also outline our proposed test for
profitability. Section 3 gives results for the empirical application and the fourth section concludes.

2. Martingale prices and momentum based trading strategies

We denote by Pot ; Pht ; Plt and Pct the opening, high, low and, closing price on day t, respectively. A
point in time on day t is given by t + d, 0 6 d 6 1. Note that Pot ¼ P t and Pct ¼ P tþ1 . The set Wt+d contains
the information available at time t + d. Furthermore, let wu(wl) denote a certain threshold price level
that is such that if the price crosses it from below (above) a momentum investor acts, i.e. takes a long
(short) position. For ORB investors, these threshold price are often set in terms of some predetermined
 U. Holmberg et al. / Finance Research Letters 10 (2013) 27–33 29

(large) relative change, q, from the opening price such that wut ¼ ð1 þ qÞPot and wlt ¼ ð1  qÞPot . For the
purpose of this paper we assume that all positions are closed at the end of the trading day. Hence, no
type of money management techniques such as a stop loss, trailing loss, and profit stop are considered.
Within the context of the present paper it is natural to involve the martingale pricing model (MPT)
of Samuelson (1965). If capital markets are efficient with respect to Wt+d some prescribed formula
based on Wt+d should not result in systematic success implying that prices are martingales with re-
spect to this information set. In particular,
 
E Pct jWtþd ¼ P tþd : ð1Þ

A direct consequence of martingale pricing is that any investment should earn a zero expected return
 
E Rctþd jWtþd ¼ 0; ð2Þ
 
where Rctþd
¼ log P ct =P tþd . As such, any investment within the MPT framework is a ‘‘fair game’’ and
from the martingale central limit theorem it follows that the returns are normally distributed (Brown,
1971).
Now, momentum investments are based on the premise that, if the market moves a certain per-
centage from the opening price level, the odds favor a continuation of that move. More specifically,
a profitable momentum based trading strategy implies that
  h i
E Pct jPtþd > wut > Ptþd and=or E Pct jPtþd < wlt < Ptþd : ð3Þ

As such, the breaking down of the martingale property implies that the martingale central limit the-
orem no longer applies. Thus, it is natural to define q as a daily return that is unlikely to occur given
normally distributed returns

qa ¼ l^ þ r^ qa ; ð4Þ
 
where l ^ are estimates of the mean and standard deviation of Rct ¼ log Pct =Pt , respectively, and
^ and r o

qa the inverse of the standard normal cumulative distribution function evaluated at a. Fig. 1 illustrates
a profitable intraday trade based an ORB strategy.
 The price opens at P ot and as long as the price stays
within ‘‘normal bounds’’, i.e. within wut ; wlt , the trader refrains from action but as soon as P tþd ¼ wut ,
the trader initiates a long position, anticipating a continuation of the price moving in the same
direction.
Given that an ORB strategy is based on intraday price movements, as illustrated in Fig. 1, it is clear
that a perfect test of profitability requires information on the intraday price paths. The challenge we
take on here is that of designing a test with access only to records of daily opening, high, low and clos-
ing prices. Our basic observation is that if the daily high (low) is higher (lower) than the set wut wlt , we
know with certainty that abuy  (sell) signal was triggered at some point during the day and that a po-
sition was initiated at wut wlt . For the purpose of this paper we assume a perfect order fill at the

Fig. 1. An ORB strategy trader enters a long position if the intraday price exceeds wut .
30 U. Holmberg et al. / Finance Research Letters 10 (2013) 27–33

threshold price, a zero bid ask spread, as well as zero commissions. Consequently, real-life trading pro-
duce slightly different results.  
 
Upon defining the return series Rlong t ¼ log P ct =wut and Rshort
t ¼ log Pct =wlt we may consider the
averages
P  h 
1 Pt > wu Rlong
t
long
R ¼ P   ; ð5Þ
h u
1 Pt > w
P  l 
1 Pt < wl Rshort
t
Rshort ¼  P   ; ð6Þ
l l
1 Pt < w

where 1() is the indicator function. If strategies based on ORB filters are profitable then Rlong and Rshort
should be significantly larger than zero. To assess statistical significance we rely on the bootstrap ap-
proach suggested in Brock et al. (1992). Here, we face additional challenges compared to their work as
the case at hand is multivariate with a natural ordering of the level series. A reasonable procedure that
accommodates this restriction proceeds as follows.
Assume that the level series share a common trend (cf. co-integration). Hence, considering a
‘‘benchmark’’ series to bootstrap the general levels appears reasonable. The other series may then
be obtained as bootstrapped deviations from the benchmark series. To  this end we consider the daily
opening priceas the benchmark series and define Rot ¼ log P ot =Pot1 ; t ¼ 2; . . .; T. Also define  devia-
tions Rit ¼ log Pit =P ot for i = {h, l, c} and t = 1, . . . , T. Collect these returns in Rt ¼ Rot ; Rht ; Rlt ; Rct are then
drawn randomly with replacement, generating an pseudo-sample of returns. Based on this sample, an
alternative realization of the level series is then generated. This procedure is repeated N times to gen-
erate sampling distributions of Rlong and Rshort respectively. The sampling distributions are then used in
the standard way to test the null of zero expected returns against the alternative of positive ones.

3. Application

We apply the testing strategy presented above to a time series of US crude oil futures prices ob-
tained from Commodity Systems Inc covering the period March 30, 1983–January 26, 2011. When
constructing the time series the switch from the near-by contract to the next typically occur around

Fig. 2. The evolution of the daily open price for US crude oil futures adjusted for roll-over effects from March 30, 1983 to
January 26, 2011. Source: Commodity Systems Inc.

Table 1
Descriptives of the daily return series.

Obs. Mean Std. dev. Min Max Skewness Kurtosis Jarque–Bera

6976 0.02 0.72 6.06 9.90 0.16 10.26 30,668
Table 2
Empirical results. The a is the tail probability, and q gives the associated percentage return. N is the number of trades. Freq. gives the proportion of trades that result in positive returns, while R
gives the average returns.

Long Short

U. Holmberg et al. / Finance Research Letters 10 (2013) 27–33

a (%) q N Freq. Rlong p q N Freq. Rshort p

Full sample 10 0.9388 738 0.6057 0.2019 0.0000 0.9013 826 0.5424 0.1439 0.0000
5 1.1996 439 0.6036 0.2180 0.0000 1.1621 497 0.5714 0.1784 0.0000
1 1.6889 188 0.6117 0.2583 0.0001 1.6513 224 0.6205 0.2442 0.0003
0.5 1.8680 141 0.6028 0.3108 0.0002 1.8304 172 0.6454 0.2527 0.0008
0.1 2.2373 80 0.7125 0.4027 0.0010 2.1997 98 0.6225 0.2489 0.0147
1983-03-30 to 1992-06-29 10 0.7840 260 0.4923 0.0334 0.2539 0.7574 272 0.5368 0.0871 0.0430
5 1.0024 159 0.5157 0.0711 0.1350 0.9759 156 0.5192 0.1313 0.0401
1 1.4122 72 0.4861 0.1140 0.1246 1.3857 73 0.5753 0.1978 0.0563
0.5 1.5623 57 0.4912 0.0799 0.2467 1.5357 56 0.5893 0.2420 0.0494
0.1 1.8716 33 0.5758 0.1656 0.1448 1.8451 41 0.6342 0.1026 0.2859
1992-06-30 to 2001-10-11 10 0.6069 373 0.5657 0.0374 0.0357 0.5947 371 0.5148 0.0307 0.0734
5 0.7772 195 0.5795 0.0634 0.0196 0.7650 214 0.5327 0.0228 0.2172
1 1.0966 62 0.5807 0.0843 0.0357 1.0845 79 0.5317 0.0258 0.6814
0.5 1.2136 53 0.3962 0.0068 0.4546 1.2015 57 0.5790 0.0608 0.8091
0.1 1.4548 20 0.5000 0.0254 0.4061 1.4426 27 0.3333 0.0290 0.6420
2001-10-12 to 2011-01-26 10 1.2956 245 0.6612 0.2813 0.0000 1.2216 300 0.5967 0.2483 0.0000
5 1.6524 138 0.6522 0.3405 0.0004 1.5784 177 0.6328 0.2734 0.0001
1 2.3216 50 0.8000 0.5155 0.0063 2.2477 64 0.6406 0.3879 0.0006
0.5 2.5667 44 0.7500 0.4926 0.0062 2.4927 48 0.6667 0.3892 0.0008
0.1 3.0718 23 0.8261 0.6397 0.0096 2.9979 28 0.7143 0.3763 0.0054

31
32 U. Holmberg et al. / Finance Research Letters 10 (2013) 27–33

Fig. 3. Average returns on the tail probability (a).

the 20th each month, one month prior to the expiration month (see Pelletier (1997), for details on the
adjustment of roll-over effects). Commodity futures are as easily sold short as bought long, and are not
subject to short-selling restrictions while the costs associated with trading (e.g. slippage, bid ask
spreads, and commissions) are often relatively low. In Fig. 2 we plot the evolution of the level series.
The series exhibit a cyclical pattern and follows a positive long run trend reasonably due to inflation.
Notable is also the sharp drop during the 2008 sub-prime crisis.
In Table 1 we give some descriptives for the daily returns series, i.e. Rct . The series exhibit positive
skewness and excess kurtosis and consequently the Jarque–Bera test strongly rejects normality.
The values of the q’s (and consequently the threshold prices) are derived from the sample. We thus
check ex post for the existence of intraday trending of oil futures prices.
As can be read in Table 2, the ORB strategy results in significant positive average returns suggesting
that the ‘‘fair game’’ argument embedded in the Martingale pricing theory does not hold true for ad-
verse price movements. Interestingly, as we tighten the criterion used to determine entry, i.e. if we
move further down the tail of a normal distribution, both the success rate and average returns in-
crease. Fig. 3 clarifies this relationship. However, it should be noted that by moving down the tail
of the normal distribution, we also reduce the number of trades, reducing the investors potential
profits.
Dividing the full data set into three sub-samples, 1983-03-30 to 1992-06-29, 1992-06-30 to 2001-
10-11, and finally 2001-10-12 to 2011-01-26 we find that the most recent time period drives the
result. Given the possible resemblance between the ORB strategy and the stylized fact of volatility
clustering in financial returns series, one plausible explanation is the relatively high volatility in the
2001-10-12 to 2011-01-26 period. After all, ORB is a directional strategy in the sense that either a long
or a short position is established and hence it is basically long volatility in contrast to hedge fund strat-
egies such as Long Short Equity, Market Neutral strategies or different variants of Arbitrage strategies
to mention a few. Market volatility and ORB profitability should be expected to go hand in hand.

4. Concluding discussion

We proposed a way of assessing the profitability of intraday ORB strategies when long records of
daily opening, high, low and closing prices are available. In an empirical application we employ our
testing strategy to US crude oil futures. Using the full sample we find a remarkable success of the
of ORB strategies. However, splitting up the full sample into three sub-periods reveals that this finding
is not robust to time and to a large extent explained by the most recent (and most volatile) period. In
this sense, our results relate to the findings in Gençay (1998), that mechanical trading rules tend to
result in higher profits when markets ‘‘trend’’ or in times of high volatility.
A point to note is that our testing strategy will underestimate the actual profits since the closing of
the positions is assumed to occur at the daily close. Thus, days when the momentum does not carry
 U. Holmberg et al. / Finance Research Letters 10 (2013) 27–33 33

through to the end of the day or even reverses intraday will be included. In practice, the losses on
these days will be limited by so-called stop losses.
Notable is also the our filter results in relatively few trades, which restricts potential profits. Most
likely though the orb trader simultaneously monitors and acts on several markets.
Admittedly, transaction costs in terms of commission fees and bid-ask spreads will consume some
of the profits. However, for the market under consideration these are relatively small. A reasonable
estimate is 0.04%, or 0.08% round trip.

Acknowledgments

The second author gratefully acknowledges the financial support from the Wallander foundation.
We thank the editor, Ramazan Gençay, an anonymous referee, Kurt Brännäs and Tomas Sjögren for
insightful comments and suggestions.

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