Trading the SP500 CFD with the open range breakout strategy

  • master
  • 07.02.2019
  • Comments Off on Trading the SP500 CFD with the open range breakout strategy

After on January 4, FED chairman Powell emphasized that the FED is listening carefully to markets, making it clear that it can change its policy and is prepared to adjust it quickly and flexibly. Many market participants started to wonder what this rhetoric would mean, not only in terms of the rate hike cycle in 2019, but also if the reduction of the FED balance will keep running on ‘auto-pilot’.

On January 30, the day of the first FED rate decision, the intention was made clear: the FED statement declared that the FED would be prepared to adjust the balance sheet runoff ‘in light economic and financial developments’.

SP500 CFD Daily Chart

Source: Admiral Markets MT5 with MT5-SE Add-on SP500 CFD Daily chart (between August 2, 2017 to January 18, 2019). Accessed: January 18, 2019 at 9:00am GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

This rhetoric was fuel for a strong bullish intra-day move, in which traders could take advantage of a strategy outlined in one of Admiral Markets’ educational webinars called ‘open range breakout’. But, before we take a deeper look into the trading setup, and the results of this specific day, let’s recall the three steps of the S&P500 open range breakout strategy:

  1. Define open range between 3:30pm and 4:15pm (CET)
  1. Identify the advantage: based on the 15-min-EMA (10)
  • SP500 CFD trades above → Long,
  • SP500 CFD trades below → Short
  1. 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 January 30:

  1. The high and low between 3:30 and 4:15pm (CET) can be found between 2,648.1 and 2,657.5 points, so the open range is 2,648.1 – 2,657.5

SP500 CFD Open Range

Source: Admiral Markets MT5 with MT5-SE Add-on SP500 CFD 15 minute chart (between January 29, 2019 to January 31, 2019). Accessed: January 31, 2019 at 9:00am GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

  1. As you can see in the chart above, the SP500 CFD initially traded below the EMA(10) on a 15-minute time frame (purple line), but then traded back above. This resulted in the fact that only long trades were made and only if the SP500 CFD breaks out on the upside of the open range.

SP500 Open Range Strategy

Source: Admiral Markets MT5 with MT5SE Add-on SP500 CFD 15 minute chart (between January 29, 2019 to January 31, 2019). Accessed: January 31, 2019 at 9:00am GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

  1. As shown in the chart above, the SP500 CFD broke out of its open range on the upside and started to move strongly in direction of the breakout.
  2. The stop was placed at the low of the range, resulting in a risk of 9.4 points. Since the setup works with a time stop out/take profit, in the event of the trade not being stopped out during the trading day, it is taken out at 9:50pm (CET). We followed this rule and took the trade out at 2,690 points, resulting in a profit for the day for the setup of 32.5 points and a profit factor of 32.5 points: 9.4 points = 3.46 : 1.

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%.

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