Why Buying at the Open and Selling One Tick Higher Is Not a Free Profit
Summary
The document evaluates a simple intraday rule: buy instruments at the open and sell when price rises by one tick. It explains that the rule is incomplete unless it specifies how to handle positions that never reach the target, including whether to hold them, stop out, or carry them overnight. Under a hold-until-profitable approach, winners and mixed instruments may be sold quickly while losing positions remain, leaving the portfolio concentrated in laggards.
Small, frequent gains can be outweighed by occasional large losses, transaction costs, spreads, and time out of the market after a sale. One response cites historical S&P 500 open-to-high observations to show that even perfect capture of each day’s high would imply a limited average daily gain, before frictions; it also compares the outcome with buy-and-hold. The sample and assumptions are specific to that calculation, and the strategy has no demonstrated predictive edge. The broader lesson is that positive trades alone do not establish superior returns: costs, downside exposure, and a clear benchmark matter.
Key ideas
- A trading rule must specify what happens when price never reaches its profit target.
- Selling small winners while retaining losers can leave a portfolio biased toward weak instruments.
- Occasional large losses can erase many small tick-sized gains.
- Transaction costs, spreads, and missed exposure reduce returns from frequent trading.
- A strategy should be assessed against a benchmark such as buy-and-hold, not by whether individual trades profit.
Tags
Full text
# Would this extremely simple strategy make money? # Would this extremely simple strategy make money? Find a diversified set of financial instruments by whatever method you like. Every day, buy each instrument at the open price. Historically, the open price is almost never the high. Sell immediately as soon as the price is at least one tick greater than the buy price. Why doesn't this just print money? ## Answer by q.t.f. (score 5) https://quant.stackexchange.com/a/14652 There is a general principle that the answer to "Would this extremely simple strategy make money?" is "No". This is the "no free lunch" or "no arbitrage" rule. It isn't exactly a physical law, but it is a pretty decent approximation of reality. (A more nuanced version is, maybe it can make some money, but only in proportion to the difficulty, risk, and expense of executing the strategy.) Your strategy as stated is incomplete. You need to say what happens for a stock when the price goes down from the open. Do you keep holding it to close? Or set some stop-loss and sell then? Keep holding it overnight so you don't have to repurchase at the next day's open? Lets say you do that last version: keep holding. Then consider the results. Classify stocks as "winners" if they generally trend up during a day, "mixed" if they bounce up and down, and "losers" if they generally trend down during a day. At the start of the day you have a portfolio of everything. But you soon sell out of the winners and mixed stocks for a tiny profit on each. By the end of the day you are only holding losers. Do you expect this to outperform the buy-and-hold-everything strategy? I would bet even without transaction costs it doesn't, and with transaction costs it throws away money like crazy. ## Answer by Evan Wright (score 4) https://quant.stackexchange.com/a/14647 Like Good Guy Mike says in his answer, you have to account for transaction costs. But change "one tick" to "transaction costs + 1 tick" and you still have a question. One issue is that while the open may not usually be the day's high, you'll have a few catastrophic losers that you hold all day, and they may be enough to wipe out your small steady gains. If not, then why stop at the open? Any given price is probably not the stock's all-time high, so what about this: buy at the prevailing price, sell once the price reaches the price you bought at + transaction costs + 1 tick. Then buy again and repeat. Unless the occasional catastrophe wipes you out, this will make money. But this strategy is strictly worse than buy-and-hold because of transaction costs and the gaps in time between selling and the next buy. It's easy to make positive profits; it's hard to beat the market. ## Answer by Good Guy Mike (score 1) https://quant.stackexchange.com/a/14645 Because you have to take transaction costs into account. ## Answer by berkorbay (score 1) https://quant.stackexchange.com/a/14649 I just checked for S&P 500 from Yahoo Finance. From Jan 3rd, 2005 to April 14th, 2014 (2336 trading days), for 2014 days High is greater than Open and 322 days they are equal. Assume no friction. Suppose you are an almighty person to catch Highs on your trade, then in one day you will make %0.00675 on average. That is your ceiling. Now add friction and be more realistic about your predictive power. Remember the 322 days where High is the Open (things get worse). If you had had invested in S&P 500 on Jan 3rd, 2005 from the Open price and sold on April 14th, 2014 High price your return would be %51.3458 (minus some friction). This is your benchmark. This is an interesting strategy. I came across a few more. It reminds me of %y filter of Alexander although it is different. ## Answer by emcor (score 0) https://quant.stackexchange.com/a/14648 The open is also almost never the low, so you could aswell short the asset. But in both cases, you have only marginal profit with potentially unbounded losses if it does not cross tick+spread. E.g. see this change in EUR/USD exchange rate: http://www.ariva.de/euro-dollar-kurs/chart?layout=neu&boerse_id=36&t=week This event would have created a definitive extremely high loss, when going long before the ECB rate cut, which might easily counter all previous tick-gains.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.