Applying the open range breakout strategy to the SP500 CFD

July 03, 2019 11:00

The S&P500 saw a very weak May in terms of performance. In fact, the S&P500 delivered its worst May return in seven years and the second-worst since the 1960s, dropping 6.6%.

But it didn't take long for the S&P500 to recover and not only that, but also mark new all-time highs on June 20, only three weeks later.

The foundation for the strong June performance was created by a very dovish Fed, starting with very Equity-friendly rhetoric on June 4. That day, Fed chairman Powell delivered clear hints of the Fed being ready to act and cut interest rates if President Trump's trade war weakened the US economy.

As a result, expectations of the Fed cutting rates by December 2019 went up to over 99% according to the Fed Watch Tool (and soared to over 60% for three cuts in the meantime).

Source: Admiral Markets MT5 with MT5-SE Add-on SP500 CFD Daily chart (between March 23, 2018, to June 28, 2019). Accessed: June 28, 2019, at 10:00am GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the SP500 CFD increased by 11.39%, in 2015, it fell by -0.73%, in 2016, it increased by 9.54%, in 2017, it increased by 19.42%, in 2018, it fell by -6.24%, meaning that after five years, it was up by 36.8%.

With that said, you can imagine, that traders could profit from the resulting bullish price action once again on June 4, with a strategy presented in Admiral Markets' educational webinars, designed to help its traders to reach the next level on their journey to profitability in trading.

But before you are given a deeper look into the trading setup and the trade of this specific day, let's recall the 3 steps of the S&P500 open range breakout strategy:

Define open range between 3:30pm and 4:15pm (CET)
Identify the advantage: based on the 15-min-EMA (10)

SP500 CFD trades above > Long
SP500 CFD trades below > Short
Trade the break of the open range in direction of the identified advantage:

Stop above/below the high/low of the range (= 1R), take profit: "time take profit", meaning that the trade is taken out manually at 9:50pm (CET) if it wasn't stopped out before

In the following, let's go through these three steps and see how the setup would have performed on June 4:

The high and low between 3:30 and 4:15pm (CET) can be found between 2,763.7 and 2,773.9 points, so the open range is 2,763.7 - 2,773.9

Source: Admiral Markets MT5 with MT5-SE Add-on SP500 CFD 15 minute chart (between June 3, 2019, to June 5, 2019). Accessed: June 25, 2019, at 10:00am GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

As you can see in the chart above, the SP500 CFD initially traded above the EMA(10) on a 15-minute time frame (purple line). That resulted in the fact that only Long trades were taken and this only if the SP500 CFD breaks out on the upside of the open range.

As you can see in the chart above, the SP500 CFD broke out of its open range on the upside and started to move in direction of the breakout in the minutes and hours to come.

The stop was placed at the low of the range, resulting in a risk of 10.2 points.

Since the setup works with a time stop out/take profit in case of the trade not being stopped out during the trading day, it is taken out at 9:50pm (CET).

Following this rule, we did so and took the trade out at 2,800 points, resulting in a profit for the day and for the setup of 26.1 points and a profit factor of 26.1 points : 10.2 points = 2.6 : 1.

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