A Black Box Approach To Trading The Opening Range In Treasury Bonds

There is a prominence of black box and algorithmic trading in today’s futures markets. Basic black box or algorithmic systems can be effective trading tools. These can also be easy to automate and optimize.

The example in this post uses US Treasury Bond futures, however, the same concept can probably be applied to any futures market. In a different post on this site, we state our belief that technical analysis, if sound in principle, is likely to work in any liquid futures market.

Many investors using technical analysis agree that the Opening Range is considered an important time for a futures market. Note that defining the Opening Range is subjective. The Opening Range can refer to the first hour of trading, the first 10 minutes of trading, or even the first several price quotes. Defining the time frame that is most profitable requires optimization, which is a fundamental feature of black box systems - they can be optimized. By programming our trading idea, we can easily optimize our system.

This technique first defines the opening range by selecting a time frame for the Opening Range (for example, the opening range may be the first hour of the pit-traded session). After defining the Opening Range, the futures trader will wait for the market to “break out” of this predefined range.

Profit potential is based on the follow through of an opening range break out. An important component of the opening break out system is to determine how much follow through will occur. As with man black box trading systems, you need a starting point for optimization. A good starting point for this black box system would be to test to see if the break out doubles the opening range.

For example, suppose we use the first hour of the pit-traded session to define the range. Assume the range is 114-20 to 115-03. This is a 15 tick opening range. Eventually, Treasury Bonds will break out of the opening range either to the upside or to the downside.

If after the first hour of trading, Treasury Bonds break out to the downside and trade below 114-20, then we would expect a 15 tick follow through, down to 114-05. If the break out is to the upside, we would expect a rally up to 115-18.

Another consideration for any black box trading system is stop loss orders. For this system, let’s assume our stop is the other side of the opening range (if you take a buy at 115-03, your stop may be 114-20).

I am not saying this is the best place for a stop for this technique. I use this stop merely to illustrate that you could link your stop price to the opening range in the same way that the entry price is linked to the opening range. You could use a tighter stop, such as just past the half-way point of the opening range.

Although this is a general description of a system, it has great potential for optimization. Through optimization, a simple idea can produce good results (assuming money sound money management is applied).

We are currently developing this system and optimizing it for many different futures markets.