Behind The Scenes: Opening Range Breakout (ORB) Strategy [Part 2]

Key Concepts

Opening Range Breakout (ORB) Strategy
Zero-Day-To-Expiration (0DTE) Trading
Backtesting
Short Put Spread
Short Call Spread
Risk-Reward Ratio
Profit Factor
Win Rate
Drawdown
Average P&L per Trade
Return on Risk
ADX (Average Directional Index)
FOMC Meetings
Slippage
Community Bot Templates

ORB Strategy Development: Behind the Scenes (Part 2)

This video details the ongoing process of developing a personal Opening Range Breakout (ORB) strategy, focusing on backtesting and refinement for 0DTE trading. The presenter, Kirk from Option Alpha, aims to find an ORB strategy that complements his existing 0DTE trading.

1. Leveraging Community Resources and Initial Strategy

Community Bot Templates: The presenter emphasizes utilizing existing community-created bot templates as a starting point to avoid reinventing the wheel. He searched for "orb" within the bot templates section.
Base Strategy: The initial strategy tested was based on a template shared by "Jack," specifically the "Orb 60-minute 15 wide." This strategy involves both a short put spread (bullish breakout) and a short call spread (bearish breakout).
- Short Put Spread: Aims for a break above the opening range, running until approximately 12:00 PM, with a range width of 0.2% or more. FOMC meetings are skipped.
- Short Call Spread: Aims for a break below the opening range, running until approximately 12:00 PM, with a range width of 0.2% or more. FOMC meetings are skipped.
Spread Width Testing: The presenter first tested a $10 wide version of Jack's strategy, finding it performed marginally worse than the $15 wide version, which offered smoother returns on the P&L curve.

2. Iterative Refinement and Filter Implementation

The presenter details his personal process of creating variations from the base strategy (Jack's version) by using the "create another variation" option.

Variation 1: Risk-Reward Filter (10%)
- Rationale: To address concerns about pricing not always justifying a $15 wide spread and to ensure sufficient premium collection for the risk taken.
- Implementation: A minimum risk-reward ratio of 10% was applied.
- Outcome: This variation, along with a $10 wide version with a 10% risk-reward, did not perform as well as the original.
Analysis of Variation B (10% Risk-Reward Filter):
- Initial Perception: Variation B, which incorporated the 10% risk-reward filter, initially appeared to underperform in terms of total dollar profit.
- Key Metrics Comparison (B vs. A - Original):
  - Maximum Risk: Similar.
  - Maximum Drawdown: Slightly less in B.
  - Profit Factor: Better in B.
  - Win Rate: Slightly sacrificed in B, but traded significantly less.
  - Average P&L per Trade: Lower in B, but still substantial.
  - Return on Risk: Significantly better in B.
  - Risk-Reward: Significantly better in B, indicating avoidance of low-value positions with high risk.
- Presenter's Perspective: Despite lower total dollar profit, Variation B was preferred due to its more stable P&L curve, higher return on risk, and avoidance of trades with high risk and low potential profit (e.g., $1400 risk for $33 profit). The higher win rate was also a desirable characteristic for complementing existing lower win rate strategies.
Variation 2: ADX Filter
- Rationale: To incorporate a measure of trend strength or momentum, aiming to filter out periods with unclear direction, which can negatively impact breakout strategies.
- Implementation: The Average Directional Index (ADX) was tested as a filter.
- Tests Conducted:
  - C (ADX 10+): This test was identical to Variation B and yielded the same results.
  - D (ADX 15+): This variation showed marginal improvement over Variation B.
    - Improvements: Profit factor, total overall return, win rate (from 86% to 89-90%), and return on risk (from 5.5% to 6.5%).
  - E (ADX 20+): While showing better quality trades and a higher win rate, the total P&L dropped significantly, falling below Variation B. This indicated that ADX 20 might be too aggressive.
- Conclusion for Short Put Side: Variation D (ADX 15+) was selected as the newest working version for the short put side, offering a marginal improvement and smoothing out the overall performance.
  - Short Put Strategy (Finalized for now): $15 wide, 10% risk-reward, ADX filter of 15+.

3. Short Call Side Refinement

The presenter then focused on refining the short call spread strategy, incorporating lessons learned from the put side.

Initial Testing: The base short put spread was used as a starting point, with a focus on risk-reward.
Risk-Reward Filter (5% and 4%):
- Rationale: Similar to the put side, ensuring adequate premium collection.
- Outcome: Applying a 5% risk-reward ratio showed marginal improvement in P&L. Further reduction to 4% (Variation C) also resulted in improvements in profit factor and win rate.
- Metrics: Return on risk improved from 2% to 3%.
FOMC Meeting Filter Analysis:
- Standard Practice: Most bots skip FOMC meetings.
- Experimentation: The presenter tested trading through FOMC meetings on the short call side.
- Rationale: Hypothesis that FOMC meetings might continue or exacerbate downward market movements, or that the market might be pricing them in.
- Outcome (Variation D - Trading through FOMC): This variation showed significant improvement.
  - Improvements: Profit factor, total P&L, and return on risk.
  - Presenter's Observation: This was a surprising but positive result, suggesting that trading through Fed meetings was compensated.
- Short Call Strategy (Finalized for now): $15 wide, 4% risk-reward, trading through FOMC meetings.

4. Combined Strategy and Key Takeaways

The presenter then combined the refined short put and short call strategies.

Combined Strategy:
- Short Put Spread: $15 wide, 10% risk-reward, ADX 15+.
- Short Call Spread: $15 wide, 4% risk-reward, trading through FOMC.
Key Advantages of the Combined Strategy:
- High Win Rate: Complements existing lower win rate strategies.
- Good Profit Factor: Overall profit factor is strong.
- Impressive P&L Curve: While not perfectly straight and experiencing drawdowns (common drawdowns of $1500-$1700 are noted), the overall P&L curve is relatively smooth and zig-zags favorably with the short put and call components.
- Manageable Drawdowns: The presenter acknowledges and prepares for drawdowns, noting they are common for this strategy.
- Low Loss Streak: Only two losses in a row observed, with potential for 30 wins in a row.
- Overall Return on Risk: Decent.

5. Future Testing and Conclusion

Next Steps: The presenter plans to conduct more testing on the call side and explore additional event filters like CPI, CCI, and PCE.
Current Status: The presenter feels more confident about these strategies and is considering running a similar one. However, he acknowledges that more testing on the short call spread side might be needed to confirm it as the ultimate solution.
Process Summary: The process involves extensive testing, creating variations, identifying what works and what doesn't, and ultimately aiming to find a strategy that can be activated.
Call to Action: Viewers are encouraged to share their own ORB testing experiences, variations, or complementary strategies via email, community posts, or comments.

The presenter concludes by emphasizing the iterative nature of strategy development and the importance of detailed backtesting and analysis.