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Can Day Trading Really Be Profitable? (Rules, Backtest, Statistics, Performance Analysis)

Last Updated on 10 February, 2024 by Trading System

The research paper titled “Can Day Trading Really Be Profitable?” by Carlo Zarattini and Andrew Aziz delves into the profitability of day trading, particularly focusing on the Opening Range Breakout (ORB) strategy.

The study spans from 2016 to 2023, covering periods of bear markets and abnormal volatility events.

The primary objective is to investigate whether day trading, when employing the ORB strategy with leverage, can yield significant returns compared to a standard buy-and-hold strategy on benchmark indexes in the US public equity markets (Nasdaq or NYSE). Can day trading really be profitable?

Methodology Used in the Study

The authors applied a 5-minute ORB strategy to the QQQ ETF, representing the Nasdaq Index.

Let’s look at the trading rules:

  • The strategy involves identifying the high and low points of a stock during the first 5 minutes of trading and executing trades based on breakouts from this range.
  • Stop-loss and profit target parameters were set, with a starting capital of $25,000, a maximum leverage of 4x, and a commission of $0.0005/share traded.

The strategy’s performance was compared with a passive exposure in QQQ, and to address leverage constraints, the authors introduced the use of TQQQ, a leveraged ETF of QQQ.

Can Day Trading Really Be Profitable? Key findings

Yes, according to the research day trading can be profitable a s long as you use a systematic approach with a backtested trading strategy. 

Here are the major findings of the study: Can day trading really be profitable? Let’s have a look:

1. Exceptional Outperformance through ORB Strategy

The research reveals that the 5-minute ORB strategy applied to the QQQ ETF exhibited remarkable outperformance, with a day trading account initiated in 2016 experiencing a total return of 675% by 2023.

This finding underscores the efficacy of the ORB strategy in generating superior returns compared to a passive investment in the benchmark.

2. Significant Annualized Alpha and Sharpe Ratio

The day trading portfolio demonstrated a significant annualized alpha of 33% (net of commissions), emphasizing its ability to consistently outperform the benchmark.

The accompanying Sharpe Ratio of 1.12 further highlights the strategy’s efficiency in delivering risk-adjusted returns. Thus, the performance metrics are fantastic. 

3. Impactful Leverage Enhancement with TQQQ

Leverage constraints posed by brokers were identified as a challenge, limiting the full potential of the ORB strategy.

However, the introduction of TQQQ, a leveraged ETF, resulted in an astonishing total return of 1,484%, showcasing the significant impact of leveraging on amplifying returns.

4. Versatile Performance Across Market Regimes

The ORB strategy demonstrated resilience and profitability across various market conditions, navigating both bullish and bearish scenarios, including events like the short volatility shock in 2018 (“Volmageddon”) and the COVID-19-induced bear market in 2020.

This highlights the strategy’s versatility in delivering consistent returns.

5. Optimal Risk Management through Sensitivity Analysis

A sensitivity analysis revealed that optimal results were achieved with tight stop losses set at 5% of the 14-day Average True Range (ATR) and by keeping trades active until the end of the day (EOD).

This finding empirically supports effective risk management principles, such as “cut losses quickly and let profits run.”

6. Potential for Further Refinement and Optimization

While deliberately keeping the model simple, the study acknowledges the potential for further improvement.

Exploring the sensitivity of results to changes in stop-loss and profit-target parameters suggests opportunities for refinement and optimization in future iterations of the ORB strategy.

Can day trading be profitable? Conclusion

The research contributes valuable insights into the profitability of day trading, particularly employing the ORB strategy with leveraged ETFs.

The study underscores the potential of day trading to generate uncorrelated and substantial returns, with careful attention to risk management and strategic use of leverage.

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