Buy the open and set a 1% limit sell order
If I find that for stock X, for past 5 years of daily OHLC data, 80% of the time, the Open was at least 1% lower than the day's high.
If we find that in this 80% of the cases, the high was reached before the low.
So if I bought the open and set a limit sell order at 1% above the open. And a stop loss 2% below the open.
If the stop doesn't get hit, then sell at the close.
So in 20% of the time, I lose a max of 2% and in 80% of the time, I make a profit of 1%.
So is my expected profit at least (80 *1 - 40 *2) = 40%?
What is wrong with this strategy?
(2)2 Comments
Sorted by latest first Latest Oldest Best
Nothing is wrong and it should be profitable - but it sounds too good to be true. The devil is in the details and you have not described how you found those stocks.
For example, you may have scanned the 500 stocks in the S&P 500, and you may have found a few that exhibit that pattern over a given time window. But it doesn't mean that they will continue to do so. In other words they may just be random outliers. This is generically called overfitting.
A more robust test would be to use a period, say 2000-2005 to find those stocks and check over a future period, say 2006-2014 if the strategy you describe is profitable. My guess is that it won't.
One should also point out that you make a major assumption in that the high of the day doesn't occur on a gap up in morning trading. It's unlikely that you'd fill at a reasonable price, thereby throwing your strategy into disarray.
Terms of Use Privacy policy Contact About Cancellation policy © freshhoot.com2025 All Rights reserved.