



System My Old ORB System ORB with overnight gap filter Win Rate 20% to 30% 50% to 55% Reward-Risk Ratio 4.0 to 6.0 1.6 to 2.0





In my earlier post about Opening Range Breakout , I had mentioned a very simple way to trade the Opening Range Breakout. It was a simple trading system, where upon completion of the ORB period, entry triggers were placed above and below the Opening Range.That system had a positive expectancy - both in backtests as well as real trades. I mainly tested and traded that system on Nifty50 futures. The issue with that system was that it was given to huge drawdowns. With optimizations, the win rate ranged between 20% to 30%, with a reward-risk ratio of 4:1 or more.I have been testing Opening Range Breakout with different parameters , and one of the obvious tasks is to attempt to improve the win rate to minimize drawdowns. This process is still work-in-progress, but let me share one of my findings.The tests were done on the NIfty50 Future data of the last 4 years. I find that if Opening Range Breakout trades are taken only when there is a significant overnight gap, with a few optimizations, the win rate jumps to between 50% and 55%, though the reward-risk ratio goes down to between 1.6 to 2.0.Compare the 2 results:I have given ranges for the Win Rates and Risk-Reward Ratio, but keep in mind that the Win Rates and Risk-Reward Ratios generally have a inverse relationship. So if I optimize the old system for a Win Rate of 20%, then the Risk-Reward Ratio would be closer to 6. Similarly, if I optimize the old system for a Win Rate of 30%, then the Risk-Reward Ratio would be closer to 4.Which system would you choose? Applying the Kelly Criterion to maximize returns , the choice would generally be to go with the overnight gap filter.While using the old ORB system, the Kelly Criterion would restrict the capital risked per trade to between 6% to 12% and have an expected return of 2 to 10 times the initial capital per 100 trades. (The results that I got while trading the system were closer to 2 than 10). With the Overnight Gap filter, due to its higher win rate, the capital risked per trade according to the Kelly Criterion would be 15% or more, giving a minimum expected return of 25 times the initial capital per 100 trades.But again, let me put the disclaimer. There are no minimums in trading. If you have the bad luck to hit a bad drawdown, or a big slippage, or makes typos, or go psycho... then there are no minimums... psycho gamblers especially have the talent of getting account balances below zero very quickly. Even ignoring all the bad luck and bad psychology, there is no guarantee that the market will continue to behave the way it did in the past to make Opening Range Breakout a successful Trading System. These are estimates based on past data, and not a prediction of the future performance.Below, is an image on the how the ORB trades with overnight gap filter panned out on the November Nifty50 H1 charts. The Yellow bars indicate the days on which the setup occurred.I have also found a few setups that can increase the expectancy of Opening Range Breakouts further... but the study is still in progress.