I'm going to lay out, in all its glory, a very simple opening range breakout day trading system for gold that I wrote years ago.
And because its rules are so simple it continues to work in the world's most difficult trading environment:
Let's dive deeper into how this system works and how you can make this system for yourself.
Opening Range Breakouts in Gold Should Be Bought
I previously explained what Opening Range Breakouts are in this post and how you can use them to short the ETF SPY for day trading.
Basically, you have to use gold's own volatility against itself to trade the yellow metal.
All markets go through periods of calm to periods of mania on all time scales.
To day trade gold you only want to look at the volatility from the past few days, not weeks or months naturally.
Opening range breakouts are more or less just a fancy name for an expansion of volatility.
And if done properly, this what your account would look trading gold since 2001:
The idea is to buy when gold starts to move higher after a day of sideways movement.
How do you tell a computer what a sideways day is?
Keeping it simple, I tell the computer to look for days that close inside the previous day's highs and lows.
See the bars below that sit nicely inside the previous day's range which then go BOOM as prices jump to the upside in an opening range breakout.
But That's Not Quite Good Enough
Just because gold closed inside the previous day's high and low doesn't cut it however.
You need to make sure that the day's range (the high minus the low) is less than the average range of the last two months of daily ranges.
That's around 39 trading days, give or take.
Using the function "average true range" gets this job done quickly.
On top of that, and again keeping things as simple as possible, you want to make sure gold is moving higher already.
Buying opening range breakouts when gold is above its 5-day moving average works great.
How to Measure an Opening Range Breakout
Just because gold is moving higher, the day's range is small, and it was inside the previous day doesn't mean you immediately go out and buy.
Only if those three conditions are met AND then gold moves higher, do you buy.
So how do you tell a computer what a opening range breakout looks like?
You don't know it's a breakout until AFTER it's happened, right?
Sort of like fishing, you don't know there's a fish that wants to bite unless you put your line out.
So, you have to put your "line" out and see if gold wants to bite.
This is done by having the computer issue a buy order during the next day at the close of yesterday PLUS a little bit.
"A little bit" is again calculated using the average true range formula.
If gold runs into your buy order, BANG you're in the market for a day trade!
Day trading being day trading, you then naturally sell at the end of the day.
Profits From Trading Opening Range Breakouts Are Huge
I'm personally not amazed anymore that simple systems like this continue to pump out the profits for me.
Many people love to over optimize their systems, which is a guarantee of future failure.
Keeping your system's rules simple and loose means you have a robust system.
Let's look at the statistics behind this system:
Amateur trader's eyes jump immediately to the Percent Profitable line.
I personally couldn't care less for what the percent profitable number is.
In truth, you won't find ANY day trading system out there with odds better than 60 to 70%.
(Well, you might if you stumble into an over optimized system, watch your back for those.)
You really want to look at two things above, the profit factor and total number of trades.
Having a profit factor above two is pretty amazing for day trading.
And having a very large number of trades or "samples" proves that a system is not just a freak accident.
You always want to see hundreds of samples of something working out because people are fool by randomness every day.
And you don't want to be one of them.