If you follow this opening range breakout strategy you can easily sell short the SPY ETF for a day trade.
These patterns also work in the gold market, the only difference being that you go long gold when you see them.
Let's take a deeper look at why you want to short SPY when three very specific things happen.
The SPY Shorting Opening Range Breakout Strategy
"Opening Range Breakouts" are just a fancy term for "volatility expansion".
All financial markets go through cyclical periods of calm to periods of panic and mania.
When markets are calm, prices stay in small ranges, but when markets turn manic, price ranges increase.
You can make lots of money by watching this periodic behavior, creating your own opening range breakout strategy
Markets almost seem to "breathe" from small price ranges to large price ranges.
The key is to look for periods of calm, and then to short the period of mania that sometimes occurs directly after.
Let's look at some examples of this opening range breakout strategy shorting the SPY ETF:
The Opening Range Breakout Strategy: Large Range Days
We first want to look for a day with a larger-than-average range (the high minus the low).
Many different trading platforms have pre-built functions that calculate the range of a day for you.
For this opening range breakout strategy, I use TradeStation's function simply called "range".
This function takes the high of the day and subtracts the low of the day, pretty simple huh?
Then we want to look for a day with the largest of these ranges in the past X number of days (you can play with the number of days to look back at, but I've found 11 is a good value).
So what does this look like in pseudo-code:
If Range >= largest(Range , 11 days )
The Breakout Strategy: A Very Large Range Day
The second condition we want to see before selling short SPY is that the large range day is a VERY large range day.
This can be done easily by multiplying the average true range (also called "ATR") of SPY times the current day's range so we can dynamically get a normalized value to days in the past.
The average true range is just like it sounds, it's a function that takes the averages of the range of X days.
This might sound complicated, but in our opening range breakout strategy it turns out to be pretty simple, let's look at the code:
If Range >= var2 * ATR
Remember we want to see SPY's range today to be larger than its average range times a certain amount.
The Strategy: Did SPY Close Higher Than Its Open?
Lastly, we want to make sure that today was an up day (i.e., today's close is higher than today's open):
If close > open
This gives extra confidence that if SPY starts to rally the next day, we should short it at a certain point above its opening price.
If all three of these conditions are met in our opening range breakout strategy, we want to place a limit order to short the SPY ETF at the close of today plus a little bit.
Here's what your short limit order should look like in pseudo-code:
Sell short X shares at ( close + var3 * ATR)
By placing the limit short order ABOVE today's close plus a little bit we set ourselves up to profit from the fact that the S&P 500 loves to revert back to its mean price, which was lower.
opening range breakout strategy For Shorting SPY:
It may seem like the rules to this opening range breakout strategy are complicated, but they are actually very simple.
That's what you want in all you're trading systems.
I like to think of building trading systems like trying to build an earthquake-proof building.
The simplest solution is no building at all, right?
But we need a building, so we want to make the building very short and very simple.
The higher (more complicated) the building, the more likely it will come crashing down.
Keeping system rules simple is exactly the same.
The more complicated the rules (the higher the building) the more likely it will take your account down in the next earthquake.