Opening Range Breakout Strategy (PDF)
Fundamentally, the system of the ” opening range breakout” was introduced in 1990, by the American futures trader “Toby Crabel”, in his famous book “Day trading with short-term price patterns”. In effect, when forex trading, alike the closing price, the opening price affects the trend and sentiment for the day. However, as the name indicates, the opening range breakout refers to a period just after the market opens. In which the price of a financial instrument breaks his own opening range. But, despite its simple principle, scalpers and intraday traders consider it one of the most effective approaches, especially in the stock or forex or cfd market. So, to get a better understanding of what an ORB is and what an ORB trading strategy is, we recommend you to read carefully this article.
Opening range breakout
What is the opening range?
Generally, most traders give importance to the open price in financial ( forex or CFD ) markets. For the simple reason that it can reflect and provide an indication of market sentiment. Also, deliver a clue about the upcoming trend for the day. In fact, the opening range represents the higher and lower price for a given asset in a specific period after the market opens. Overall, trading ranges can be a robust technique for technical analysts. When analyzing charts, traders rely on the opening range as one of the most useful price ranges that we can spot in the market. In a way, it can show the forthcoming momentum of the price action. On the other way, it often shows strength, weakness, or a ranging movement with no clear tendency.
Usually, financial charts display the higher price and lower price of the day, which presents the same opening range through the current timeframe. However, many investors take advantage of financial announcements and events like the release of earnings statements that will impact the opening range of the asset’s price. Furthermore, traders may choose to follow an asset’s opening range in order to consider its general tendency and catch the opportune time.
How do you determine an opening range?When it was first introduced, traders consider the first hour of trading as the opening range. Nowadays, due to the faster data feeds and the use of shorter timeframes, the definition of opening range got limited to 30-min, 15-min, and even one minute. For instance, in order to specify an opening range based on the 30-minute timeframe, we would simply consider the high and low prices of the day.
In simple words, we can describe the opening range as the difference between the first high and low of the day. They will appear in the chart and act as support and resistance areas. So, we can determine these two levels once a candle is plotted after the market opens.
In order to follow the opening range, we can use multiple patterns, different timeframes, and varying forms of technical analysis. Yet, some traders prefer to use the last candle from the previous trading session and the opening candle from the current trading session. Thus, the difference between them will define the opening range.
Due to the significance of the initial move in the market, the opening range could offer plenty of possibilities to create trading strategies. One of the most prevalent strategies is the “opening range breakout”.
Opening range breakout definition
The opening range breakout is simply that break from the OR. It occurs when the price action crosses above the opening range high or crosses under the opening range low. Frequently, it happens on well-considered volume levels.
In effect, the opening range breakout can help traders to define the future price trend. However, when the breakout occurs, we expect the price to continue moving in the same direction. Thus, we can use the opening range breakout to determine entry points in the market. At this juncture, we will receive two different signals:
- A bullish signal: when the asset price beats the opening range high.
- A bearish signal: when the asset price beats the opening range low.
How do define correctly an ORB?
Up to now, we know that the opening range breakout signifies that the price moves below or above the opening range (low/high). Regardless, we can confirm strong ORB by considering three main factors:
- The initial move: The opening range represents the base and the balance area of the current day. Thereby, traders accept it as a support and resistance level. That is why it should present a strong candle with important price movement.
- Price consolidation: In markets with strong tendencies, the price consolidates at one end of the opening range. Mainly at the high of the day. Which usually makes assets move in a horizontal manner, with no clear trend and low volatility. (…)
- Volume: The opening price volume comes with a clear volume expansion than the former day volume.
As a confirmation sign for the breakout;
-Spotting a bullish candle (a bull break) after a bull break is an indication of follow-through. Hence a signal of bull domination. Contrary, if a bull break was followed by a bear candle (bear break) then it signals a fake breakout. As we designate in the image below.
-Likewise, if we remark a bearish candle after a bear break. Then we should anticipate a downward movement. Otherwise, seeing a bear break followed by a bullish candle (bull break) will indicate a false opening range breakout.
How to build opening range breakout strategy ?After explaining the Opening range breakout as well as the opening price, let’s discuss in detail the major points that can help traders build an effective ORB trading strategy. In fact, the main idea of building such a strategy doesn’t rely only on taking a position when the price breaks the high or low of the opening range. It depends also on some critical factors that we should be aware of them. Besides, we should know that such a strategy works better in the stock market where financial instruments have higher volume.
TimeframeIt is obvious that the ORB trading strategy is based on timeframes. However, when choosing a timeframe, every trader has the right to select whatever he suits. Timeframes like 15-min and 30-min are the most used while studying such a strategy. Nevertheless, sticking to 10-min or 5-min charts will not cause any issues because the concept of the ORB trading strategy stays the same regardless of the timeframe.
VolumePractically, this factor will help traders to select good stocks for trading. Overall, stocks shift in the prevalent direction of the market. However, we can note that some stocks with a catalyst move differently making their own tendency. Thus, attracting intraday traders by being traded in high volume. Indeed, stocks with expanding volume are represented in charts by large volume bars. So, to determine such stocks and trading opportunities we can simply track stocks that mark an important volume in pre-market hours.
Determine strong and clear breakouts
In order to ensure profitable trades using the opening range breakout strategy, we should first identify clear and strong breakouts. Hence, good entry points. For many newbie traders, it seems difficult to spot such range breaks. Or, to realize that, we can start by looking for a set of candles that represent a narrow range. Indeed, the narrow range indicates a period of volatility consolidation. While the opening range denotes a period of volatility expansion. Concurrently, they will indicate significant moves. So for the purpose of identifying strong breakouts, we can remark that traders combine along with the opening range, multiple techniques such as
-Narrow range patterns (especially NR4 and NR7).
-The VWAP indicator (using the VWAP region).
-Pinpointing important volume nodes.
The opening range
Before executing trades using the ORB trading strategy we should rather define our entry and exit points. For this reason, after we select the timeframe, wait until the opening range forms, and the breakout occurs, we will enter a position in the direction of the breakout. Whether upward or downward. Despite this, we must confirm that the break will maintain and will not turn into a reversal move. At this moment, stop loss takes place. So by setting a reasonable stop loss, we will avoid unexpected losses. However, where to place the exit point counts on our risk tolerance. Thereby, we find some traders that prefer to place a stop loss in the middle of the OR, while others set it at the same level as the high or low day price (depending on the situation).
Moreover, the customary dealing with the opening range has made traders consider four main types of day patterns that repeatedly happen in the market. Thus, relying on the open price, we can anticipate what kind of day may happen:
- Trending day: is characterized by a high volume at the opening that reflects a sharp move. Hence, it will result in a small opening range. Also, this type is marked by making every period a new high and low.
- A double distribution trend day: this type is known for being inactive and passive at the opening. Also, it has a narrow opening range. However, when the ORB occurs, we can expect a strong tendency.
- Ranging day: is represented by a wide range in which the price goes up and down throughout the day without any apparent direction.
- A typical day: this type depicts a very wide range (a big candle at the opening) with an intensive move and high volume. Despite this, we will see the price moving around the high or low of the range during the day.
ORB trading strategy example
As we mentioned earlier, using the opening range breakout will help us determine entry and exit points. Also, it deletes the ambiguity of where to put the stop loss.
Frequently, the ORB trades are carried out on short timeframes and take end very quickly.
In fact, scalpers who depend on the ORB trading strategy will most probably use the 3-min or 5-min timeframe. While day traders and swingers prefer a little longer timeframes (15-min and 30-min charts).
In the below example, we highlighted the opening range with two blue horizontal lines. Actually, this 15-minute chart represents “Tesla” which is popular in the stock market for being a big mover.
As we see, the day opens with a high volume. The opening range is between 720.99 $ ( the day’s high) and 708.55 $ (the day’s low), which is very tight for a stock like “Tesla”. However, after spotting the breakout, taking a position would be on the bearish candle after the break (below the 708.55 $). For the stop loss, we can place it around the day’s low. So, when the price breaks the range, it kept moving down creating a profitable trade.
Generally, traders use the opening range breakout to identify multiple signals, such as the prevailing attitude for trading for the day. However, we think that we need to rely on other key levels as well. Thus, using technical indicators can provide much more accurate trading information. For instance, knowing if the asset is in an overbought or oversold area can help in confirming the breakouts.