- May 28, 2019
- Posted by: CoachShane
- Category: Trading Article
The opening range breakout strategy (ORB) has been around for decades and is a trade taken above or below the opening range of a market.
Some traders may use a predetermined price points, something Toby Crabel calls “the stretch” which is a calculation from previous trading days.
Others will use the breakout itself, price action at the range extremes or the reaction after the breakout after the market opens.
Let’s take a look at a few ways to define the opening range and then cover how we can use them as part of a trading strategy.
Defining The Opening Range
The most basic form of defining the range is to use the high/low of the previous day close and the high/low of the first 30 minutes of the open.
This is a great method because it takes into account the gap in price between the two trading days.
There are times that gaps get filled after the opening bell and if you enter a breakout and the gap gets filled, it can be a painful trade.
Knowing the gap in price is present and the distance of the gap, will help you better mange any trade you may enter.
Forex traders may look to mark off the high and low of the Asia trading session to determine the opening range high and low as you go into the London session.
Here we have marked off the low and high of the first 30 minutes of trading on the ES and ignoring the previous day price action.
There are other methods to determine trading ranges of interest that includes a series of 5-6 daily inside bars or a NR7 bar – where the daily range is less than the previous 6 trading days.
Now that we have defined several methods to define a range, let’s look at some opening range breakout strategies that you can begin to back test. It won’t cover all scenarios, as there are many, but can form the foundation for you to begin designing your trading plan.
Basic Opening Range Breakout Strategy
Here we will use the range definition using the previous days close high/low and the first 30 minute high/low. This can be adapted to all opening range definitions.
I purposely chose a stock where the open had a low that was lower than the low of the previous days close. This is where you have to adjust and use the lowest low (or highest high) depending on how price action unfolds.
This stock, PINS, was also featured in a recent Options Trade Of The Week and you can read about that trade here.
- The open put in a low that was lower than the previous days closing candle low. This now forms the bottom of the opening range on this chart
- Price breaks out of the high of the 30 minute range and falls into a support zone for a .23 drop before taking off to the upside
- We measure the size of the range and project that from the top of the 30 minute range in this example
- Price hits that target for a $1/share move which if you trade in shares of 100 for Options trading purposes, you made gross $100
Stops can be in the middle of the range depending on the size. Pullbacks after a breakout back into the range does not automatically mean the breakout trade failed. In this example, the better stop would have been under the low of the red candle that formed the high of the range.
Using price structure or ATR for your stop loss is a viable approach to any trading strategy.
While this opening range breakout trade made target, some won’t.
Some profit target objectives can be:
- Use an ATR reading for your profits
- Look to find stalling price and a range structure to being to form signalling a loss of momentum
- Any obvious momentum candle will give fast profits. Consider placing your stop half way inside that type of price move
It is vital that your trading plan include how you will enter your trades, exits, risk, and exactly how you define ranges.
Asia Session – London Session Breakout For Forex Traders
In this Forex example, we will use the 15 minute GBPJPY FX chart to show how the ORB strategy works when the market changes session.
Keep in mind that in Forex, the Asia session is generally muted price action and the London session is when many large moves happen.
- This large area between these horizontal lines highlights the high/low price range that formed in the Asia session
- As price moves into the lower end of the range, we can anticipate a breakout to the downside and place a sell stop order several pips below. Our stop loss can be 2 X ATR which was about 20 pips.
- This is our price target which is the distance between the high and low Asia range. This trade hit target for 50 pips.
Other possible ways to manage this trade was to trail your stop above the highs of each candle once price started to break to the downside. We always want to be careful of momentum candles as they can form an exhaustion move that will see price snap back against your position.
30 Minute Opening Range Breakout
Let’s look at a popular trading instrument here at Netpicks, crude oil on the 5 minute chart. Remember, these same concepts you are about to learn apply to the other range definitions as above.
With this example, we will dig into price chart patterns that I use on a regular basis in my own trading and the entry points that exist. If you need to learn how to trade common price patterns – with skill – download this free PDF on trading price patterns.
- Here is the low of the range and we could anticipate the breakout and place a resting order to sell when price breaks the range. This is not what we will do in this ORB strategy
- After a leg down in price (impulse move), we are looking at a pullback (corrective move) and we can trade the trend line break or a break of the inside red candle
- Price forms a double bottom and we could consider the leg into the bottom as a pullback. Trade the trend line break for the entry
- Price moves back inside the defined range and we get a pullback. We can see an obvious reversal candle into a support zone (green line). Trend line break entry
- Price breaks the range high and forms an upthrust (failure test entry). You can trade the break of the lows of the obvious candle reversal
Keep the stop loss order placement and profit targets simple and repeatable.
Using the ATR as a means for both is a great start and you can refine both as you gain trading experience.
The Stretch Trade Entry
This is from Toby Crabel and is a mathematical way of determining your exact price for trade entry. You could use it for any of the range plays discussed.
- Take the High – open and the open – low for each of the 10 previous trading days
- Take the lowest number
- Add them up and divide by 10
As an example:
56.32 – 54.95 = $1.37 (High – Open)
54.95 – 54.79 = 0.16 (Open – Low)
You would do the same calculation for the previous 10 days.
You then add up all the lowest numbers and divide by 10.
Assume that all days had a low value of .16 for this example
.16 x 10/10 = 0.16
You would set your entry 0.16 above and/or below the range.
For those looking for an objective trade entry, this is as objective as you can get.
A lot was discussed here so let me give the cliff notes version of the ORB.
You have several ways to define the opening range:
- High/low of the previous days close and the high/low of the current trading session (15 – 30 minutes)
- The Asia session in Forex can offer some great ranges you can trade when the London session opens
- The first 30 minutes of the session
There are two strategies that you may find useful when considering trading opening ranges:
- Trade the actual breakout or look for signs of pending breakouts and position before the break
- Use simple price action and price patterns to trade after the break
Stops and targets will depend on the trader but consider:
- ATR stops and targets use the volatility of the market and is an objective measure
- Use the distance of the gap as your price target
- Ensure you do not ignore momentum in your favor as a means of removing risk from trade.