Every Open Down Trading Strategy (Buy Every Open Down?)

Last Updated on April 19, 2022 by Quantified Trading

In the long run, one can expect to be rewarded for taking risks. Let’s test a very simple strategy with this in mind. Let’s buy every open down.

Every Open Down Trading Strategy

If SPY (which is an ETF of S&P 500) opens down, but above -0.45, then go long at the market, vice versa for short. We don’t want to buy lower if it opens lower than -0.5%.

The reason is simply the downward pressure has just increased when that happened the last two years. The exit is at the close. The test period is from 1. January 2010 until 29th of June 2012. We get the following accumulated chart in total percent, excluding commissions and slippage with a 0.2% target:

The average is .11% for longs and .05% for short. Obviously, we get different results for where we set the target, but the best seems to be a target of .25%.

Let’s put in another criterion: for long the day before has to be a down day, vice versa for short. Then we get the following curve:

Average for long increases to 0.14% and for shorts to 0.053%. We can conclude that for longs this seems to be a tradeable strategy.

Why should this work? There is an element of mean reversion in SPY. Also, the target should take us out with a reasonable profit to make this worthwhile.

Sometimes there are “bad prints” in the quotes. Therefore, the results might not be accurate. The high of the day might be higher due to erroneous prints/trades. One can expect this strategy to be worse than tested. It’s always like this. This has to be traded in real life for proper testing. One can trade the smallest position, 100 shares, to test this.

Another good thing about this strategy is that there should be no slippage unless our positions move the market. If trading between 1000 to 5000 SPY that is probably not the case. We trade at the open and at the close.

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  • yes, curve fitting is extremely dangerous when designing new strategies. Therefore, one should use walk forward optimisation to minimise the risk. (I know you know all this Oddmund, but it might be useful for someone else reading this)

    I do it like this:
    1.Find a strategy idea that you can explain the reason behind – or if it something you have observed several times, and want to test if it is correct over time.

    2. Implement the strategy to ninjatrader (in my case)

    3. Use the walk forward backtest function – The backtest period should be 3 times the forward test period.The test period should be long enough that is is significant – this depends on if it is long term swing trading or a intraday strategy. It should be tested under different market conditions.

    example: Test the strategy in the period 2010 – 2011 , this is what happens. January – February and march is used to curve fit your parameters, and the parameters are then used in april for ordinary backtesting. Then Feb + Mar + Apr are used for curve fitting, and the values are used for backtesting in May etc…

    4: implement the strategy for automated trading to your sim account. You have to do a manual optimisation(you might be able to automate this process too) every month and change you strategy parameters accordingly.

    5: Go live – automated trading on your real account –

    Doing it like this you minimise the effect of curve fitting

    ps. Don’t forget to use commission and slippage in your strategy testing. I use 1 for slippage and whatever commision I have to pay to my broker (depends on the instrument). This is very important when designing intraday strategies.

    All the best, and good luck

    Truls.

    • Thanks for some very good points. I was about to write about this later. Obviously I should have done that before I ever wrote about strategies….

      I ususally do it this way you describe, but sometimes I never have “out of sample test”. The reason is that my experience tells me I rarely can replicate the test results anyway, usually due to bad quotes and don’t get the best fills. Yes, I always expect to NOT get the best fills in real trading. So sometimes better to just test it live with the smallest possible size.

      • I am not sure I would like to trade this strategy. It is very likely that it is curve fitted, and with commission and with not getting the best fills… Furthermore, the short strategy works much worse, which makes me believe this might be because SPY has been going slightly upwards since 2010? the short strategy might do better during downtrends, but then you have to trade both, which makes the average trade gain % worse.

        You say that the best way to find out is to trade with a small amount, but I would think it takes several months before you get a decent sample size?

        This is not the trading I normally do , so I am just trying to get a discussion going, and learn.

        What would you say is the minimal intraday per trade % gain you would “test trade”? Any other factors you would consider?

        The answers, and all you could add would make a really good article 🙂 *HINT*

        Truls

        • I’m trading this strategy now. A nice gain today, I hold it to the close. Nothing going on today, no news, many on holidays. According to my research these are very good days to go long.

          Why does it work? Because of the upward bias, yes, but also because you’re providing liquidity for the sellers. In the long run you should be paid handsomely for this.

          The reason I trade it because of my stats in stocks. Shorts are in general untradeable when the market opens slightly down. That is from my real trading stats. I hardly trade short on these days, and instead go long SPY.

          Thanks for feedback, that’s one of the reasons I write here.

        • To find good short strategies are very difficult. In fact, if someone can make money going only short year after year, they would have money thrown after them (because of the diversification effect). Also, the market falls much faster than going upward. Hence, one must trade long and short different.

          In SPY I would like to see 0.1% gain per trade to make it worthwile.

          Trading on the close and open makes slippage basically non existent. And commission is just 0.0028 cents per share. That is 2.8 USD for buying 136 000 USD worth of SPY.

          • Thanks for your answers!

            One of the best parts of this is the increased leverage one has intraday compared to holding the position overnight. For those of us that has to consider it. a 0.1 percent gain a day vs 1% over a period of 10 days is the same, right? No, it is not – I get a lot more margin if I do not hold the trade overnight.

            Truls

  • Yes, but if you trade S&P futures you could also get leverage. However, I’m only trading SPY now. I can’t trade futures where I’m trading right now.

    Off topic: Are you trading EOD strategies? And US stocks?

      • And by increased leverage(margin) I meant for stocks and ETF’s , not futures 🙂

        Truls

        • And yes – one could Long ES on the SPY signal. Increased leverage, and one can follow this strategy with less than $25 000 on the broker account.

          Truls

          • Do you scalp based on the ticker tape, or do you have some kind of mechanical trading system?

  • Manual tape reading! If I had anything mechanical, I woould send it to you. I am not sure it would be possible to make anything mechanical based on the tape! Maybe based on absorbtion of marker orders , or something similar!

  • This is an interesting concept. Have you considered the gap size compared to ATR and Stop loss and profit taking with basis of the ATR? Even the open price compared to the last days OHLC could have some meaning? One could really expand on this simple concept.

    Truls!

    • Oh yes, I’m testing every twist I can think of. What I show here is just 1% og what I test. There are so many twists one can do. But in general, gaps have been more difficult over the last year. Too many computers around 🙁