Opening Range Breakout

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Opening Range Breakout

Back To Basics

Most of you know I like simple trading methods that make sense. I posted an article about 3 bar retracement entry strategies and got tons of positive feedback.

You can read the article by clicking here . Some of the feedback was from traders who were pleasantly surprised that such simple entry methods could be so effective.

The great majority of the feedback I received were requests for additional entry methods that were simple to interpret, execute and manage.

Keep It Simple

The reason I’m focusing on simple strategies is because so many times I see beginning traders who believe that complex strategies equate to profitable strategies and that is not the case.

In reality, the more complex the strategy the more difficult it is to interpret, execute and manage, therefore; more often than not complex strategies do not equate with accuracy or profitability as often believed to be the case.

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Take for example Gann Lines or Elliot Wave Theory, I know a few traders who traded using these methods, but never for more than a few months at most, moreover I have never seen a professional fund manager utilize these methods effectively or profitably in the past.

Opening Range Breakouts Withstood Test Of Time

This is what led me to write about the opening range breakout method. This simple entry strategy has been around for more than 50 years and remains one of the most popular entry strategies to this day. As a matter of fact, I know several professional traders and fund managers who use the opening range breakout as their primary entry method.

The opening range is the highest price and the lowest price traded during the first half hour of the trading day. I sometimes refer to the first half hour trading range as the opening price bracket.

This particular trading period is important because more often than not it sets the tone for the remainder of the trading day. Between the closing of the previous trading session and the opening of the current session several intervening events can occur.

These events can have a major impact on the upcoming trading session. For example government reports, stock earnings, overseas markets news and dozens of other fundamental and technical factors play a vital role in the U.S economy and more relevantly on market sentiment.

There Is Strong Build Up From Overnight Markets

Typically, during the first half hour of the trading day, which happens to be the most emotional part of the trading session, markets absorb the overnight information and reflect this information in their price.

Even though most markets are open virtually around the clock, the majority of volume and volatility does not appear during the overnight session but begins after the stock market opens each day at 8:30 central time.

This is when institutional traders come into the market, buying and selling enormous quantity of shares through computerized trade executions systems called program buying and program selling.

The volume is so enormous that it can have a very strong impact on the short term movement of the stock market.

These institutional buy and sell programs do not get executed during the overnight session, therefore it is very difficult to truly see what impact the overnight market will have on the stock market till the stock market actually opens and begins trading during the regular day session.

There have been numerous times when the overnight market is pointing in one direction with a very strong bias, only to open and move completely in the opposite direction within the first half hour of the trading session.

Therefore, overnight markets offer strong clues into the direction the market is headed but ultimately, there is no better indicator of market direction than the market itself after the first half hour of the trading session.

Conditions Must Be Met Before Execution

To trade the opening range breakout, I prefer to use a 5 minute bar chart and place a buy stop a few ticks above the highest price reached during the previous six bars and simultaneously place a sell stop a few ticks below the lowest price reached during the past 6 trading bars.

In addition, I need to make sure three additional conditions are met before I enter the market in either direction.

Avoid Trading Late In The Day

The first condition to market entry is time. The market must hit the buy stop or sell stop within one hour of defining the high and low of the opening range bracket or one and half hour after the opening bell.

From years of observation and computer back testing several different markets, I concluded that the quicker the market breaks above or below the opening range bracket, the better the odds of the trade working out.

In addition, most breakouts that occur later in the day, do not carry sufficient momentum to sustain the volatility and direction that is worth the risk of entering the trade after the first hour and a half of the trading day.

Bias Towards One Side

The second condition prior to placing my entry order that I like to see is continues bias towards one particular direction. I often times see markets swing back and forth between the high and the low of the opening range.

The majority of the time when I see this type of market action I avoid entering the market even though all other conditions have been satisfied.

The ideal market action prior to breaking out of the opening range occurs when the market tests either the high or the low on more than one occasion or trades close to that level repeatedly, making higher highs and higher lows in anticipation of breaking out to the upside or alternately making lower lows and lower highs for the majority of the first half hour leading to a breakdown to the downside.

What I don’t want to see is market that keeps swinging back forth in a choppy trading range between the high and low bracket.

Volume Drying Up Is Not Good

The third and final condition to entry is volume. There must be a substantial and gradual build up or increase in volume leading up to the breakout or breakdown in price outside of the opening range price bracket.

The vast majority of the time market volume peaks during the first 15 minutes and the last 15 minutes of the trading day, as a result the volume at the 30 minute mark typically begins to fall off substantially, making it difficult to gauge volume at the 30 minute mark accurately, even when markets are making new highs or lows.

My solution to deal with volume drying up is simple, as long as volume is dropping off gradually and is still within the range that existed during the first 15 minutes of trading, I don’t consider it a trade breaker. If however, I find that volume is barely moving compared to how it was during the first 15 minutes, I reconsider placing the order.

While monitoring volume is not an exact science, with time you will develop a good feel for how volume comes into the market and how markets react to volume.

Always remember that breakout entries are typically accompanied by increase in volatility, make sure your stop loss takes into account the added volatility and adjust your stop loss levels accordingly.

Good luck in your trading!
Roger Scott
Senior Trainer
Market Geeks.

Warrior Trading Blog

In markets, all times of day are not created equal. We know the open and close are important, but why? Most of us have a vague idea why, and may have heard a few quotes about the open, but do we really know why the open is so important?

The open often establishes the trend and sentiment for the day, but there is also statistical significance to the open that is overlooked. Some intriguing data from Adam Grimes implies that there is repeated behavior around the open.

Source: Adam Grimes blog. OPR Data from 46,000 daily bars

The above graph encapsulates the entire idea behind the opening range breakout strategy: there is a quantifiable pattern around the market open. Grimes took 46,000 daily bars from various stocks, futures, and currencies, and plotted the open of the bar as a percentage of the daily range.

In other words, as you can see in the graph, more often than not, the open is near the high or low of the day.

The tendency for the open to cluster near daily highs or lows gets even more substantial when Grimes was selective with his data. He ran this test on what he calls “two sigma days,” in the E-mini S&P futures, which are essentially highly volatile trading sessions.

You can make your own inferences based on this data, but the one thing it makes clear is that the market open is the most important price of the day. Each print doesn’t carry equal significance.

Opening Range Breakout Explained

Due to the significance of the open and the possibility of non-random price movement, the open, and specifically the opening range, gives us plenty of opportunities to build trading strategies.

Trading the opening range makes things simple because it gives us defined entry and exit points. There’s no gray area about where to place your stop.

An opening range breakout is just that: a break from the opening range. Depending on your timeframe and testing, you will define the opening range differently. Traditionally, when the strategy became popular in the 1990s, the opening range is the first hour of trading after the open.

As time moved on and traders got access to faster data feeds and worked on shorter time frames, some opted to narrow their definition of the opening range to the first half-hour, 15 minutes, even one minute in some cases.

Here’s an example of a stock’s opening range:

Above, we have a 15-minute chart of Apple stock on October 11th, 2020. To establish an opening range based on the 15-minute timeframe, we would simply take the high and low of the first 15-minute bar, then we have our opening range.

Assuming we had a bullish bias on Apple, we would take the long signal on the second bar. If the stock just traded within the opening range for a few bars, the trade’s probability of profitability goes down with each subsequent bar. We also wouldn’t take short signals (breakdown below opening range) because of our bullish bias.

This idea was popularized by Toby Crabel, a successful hedge fund manager focused on short-term trading. In the 1990s he wrote a book about the strategy that goes for over $200 used on Amazon. The book is called Day Trading With Short Term Price Patterns and Opening Range Breakout. In the book, Crabel published several statistical models that show a clear edge in the opening range breakout trade.

Opening Range Breakout Strategy

To use a poker term, one of the biggest “leaks” in retail trading is trying to get a “strategy in a box.” In other words, they’ll find an established strategy with some encouraging back tests and data, like the opening range breakout, and try to trade it “out of the box,” with nothing else applied. No market context, no regard for the specific product they trade, no criteria for trade selection, etc.

These strategies are simply a starting point. It’s clear that there is some statistical significance to market behavior on the open but trading purely off of that is probably going to yield mediocre results. We know that there’s no free lunch. Seldom can you simply Google search a trading strategy, follow a couple of steps, and have a profitable trading strategy.

There are additional things you must do to put the odds further in your favor and keep you out of the bad setups.

Trade Stocks in Play

Stocks typically move in line with the broad market. So, if you decide to trade Google stock based purely off of the fact that you feel like trading a big tech name, most of the time, Google is going to move in line with the S&P 500. So you’re basically just buying beta everyday.

Stocks that have a catalyst, though, march to their own beat. They have considerable volume coming into them, which begets more volume as the momentum traders pile in as well.

A simple way to build a watchlist of stocks with catalysts every morning is to simply see which stocks have high relative volume and big price moves during pre-market. Then look at what is causing it: is it an earnings report, news, dilution, something else? Look at the stock’s news on your news feed, and look at their recent SEC filings. If you find nothing, it’s better to stay away because you can’t identify why a stock is moving.

Have a Directional Bias

One of the best ways to shift the odds further in your favor is to establish a directional bias in the stocks you trade. Perhaps you find a stock with a strong catalyst: it just reported a positive earnings surprise. All indications would point to that being bullish for the stock.

Based on this, you should decide to only trade on the long side. If the stock does happen to make a move on earnings, it’s likely to be an upward move. If the stock happens to sell-off, it’s obviously suboptimal to take that short setup.

Longer Term Price Action

We know it’s useful to establish a directional bias based on the catalyst. If we follow the chain of events: see a stock making a big move on the scanner, do research to find the catalyst, decide if the catalyst is bullish or bearish, and establish a directional bias through that.

From there, we want to look at the chart and decide if the stock is even worth trading, even with the catalyst in mind.

How to Trade Opening Range Breakout (Example)

Trading the opening range makes things simple because it gives us defined entry and exit points. There’s no gray area about where to place your stop.

This trade is taken usually on the 5-minute, 15-minute or 30-minute time frame and generally resolves very quickly.

For scalpers the most popular time frame is 5-minutes and for intra-day swing traders they will most likely use the 15-minute of the 30-minute time frames.

In the above example you will notice that the opening range is indicated between the two dotted red lines. We are looking at a 5-minute chart of NVDA which is known for being a big mover whether it’s in play or not.

This is a great setup because it opened above the VWAP failed to break over pre-market highs and then closed below the VWAP showing that sellers were stepping in. The opening range was between $109.41 and $108.95, which is pretty tight for this stock.

Entry would have been on the break below $108.95 with a stop at 109.41. When prices flushed through it kept falling hard and was a fairly straight forward trade that could have earned well over a point in profits.

This is a high probability setup and when it hits can easily give you 3 to 1 risk/reward and often even more.

Final Thoughts

When trading opening range breakout’s it’s important to look for other key levels as well if the stock is oversold or overbought. It will help confirm price action and will give you greater confidence trading the breakout.

The breakouts also work better on stocks in play that have a high relative volume for that time frame whether be for 5-minute or 30-minute. You’ll also want to look for setups where the opening range bar opens above VWAP and then closes below.

Here’s a good check list for trading an opening range breakout:

  • Have a bias: long or short, don’t take in either direction
    • Establish your bias based on the daily chart’s price action. Trade in direction of the trend/supply-demand imbalance
  • Catalyst
    • News
    • Earnings
  • Criteria
    • Momentum, volume, low float, liquidity

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Barber, Brad & Lee, Yong-Ill & Liu, Yu-Jane & Odean, Terrance. (2020). Do Day Traders Rationally Learn About Their Ability?. SSRN Electronic Journal. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2535636

Garvey, Ryan and Murphy, Anthony, The Profitability of Active Stock Traders. Journal of Applied Finance , Vol. 15, No. 2, Fall/Winter 2005. Available at SSRN: https://ssrn.com/abstract=908615

Douglas J. Jordan & J. David Diltz (2003) The Profitability of Day Traders, Financial Analysts Journal, 59:6, 85-94, DOI: https://www.tandfonline.com/doi/abs/10.2469/faj.v59.n6.2578

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Opening Range Breakout (ORB) Strategy Guide

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.

  1. 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
  2. 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
  3. We measure the size of the range and project that from the top of the 30 minute range in this example
  4. 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.

  1. This large area between these horizontal lines highlights the high/low price range that formed in the Asia session
  2. 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.
  3. 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.

  1. 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
  2. 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
  3. 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
  4. 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
  5. 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.

  1. Take the High – open and the open – low for each of the 10 previous trading days
  2. Take the lowest number
  3. Add them up and divide by 10

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

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.

Wrap Up

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.
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