Opening Range Breakout Strategy Explained

By Angel Broking | Published on 21st October 2020 | 168

Opening Range Breakout Strategy Explained

Opening range breakout trading is an interesting concept that we are going to discuss it in our blog in detail. Several traders have asked us how to take advantage of opening range breakout strategy and if it is a good option. So, we decided it requires a separate discussion. In this article, we will touch the points which will help traders build a better understanding of ORB trading techniques. 

As the name suggests, opening rage prefers to a time frame right after the market opens.  While trading, traders need to choose a timeframe that better suit their trader profile, and opening timeframe is a popular one. Opening time frame refers to the first 15-30 minutes right after the market opens for trading.  

What Is Opening Price And Why It Is Important?

To understand the opening range breakout strategy, we must clear our understanding of the opening price of the day. 

Often the opening sets the mood for trading for the day – uptrend or downtrend. But it has other statistical inferences as well. Analysts often observed repetitive behaviour around the open. Adam Grimes worked on this theory, where he studied over 46,000 data from different stocks, futures, and currencies, and he plotted the open as a percentage of the daily range. The famous graph developed by Grimes showed that often the open is near the high or low of the day. The pattern became more apparent when he studied with selective data. It is the tendency of the open to cluster near high or low of the day. His studies have established it beyond doubts that opening is the most important price of the day. The opening breakout happens when stock price beats the opening range.

Key Understanding 

  • The beginning hour of the trading day is the most active and dynamic period. The opening hours sets the sentiment of the market
  • You can make the most money during the opening hour, but it is also volatile
  • Without a trading strategy, you run the risk of losing money
  • Opening chart breakout is a critical chart pattern that studies the important reversal and continuation patterns 
  • The chart captures move or reversal during the first hour

The Opening Range Breakout Trading Strategy Explained 

Due to high significance and non-random price movement, the open gives plenty of insights to build a successful trading strategy. It is often associated with high volume and volatility with multiple trading opportunities. Traders use the opening range to set entry and predict the price action of the day.

The theory gained steam during the 1990s when traders started to use the trading signals from the first hour or the opening range to set their strategy. Later though, with the availability of advanced software and data, traders also used 15-minutes and 30-minutes timeframes, but the name stuck on. 

How To Measure The Range

Since the strategy revolves around the opening range, let’s get a better understanding of what opening range is. The opening range refers to the price action during the first hour of trading. A simple way to measure the range is by taking the high or low of the previous days and studying it against the high or low of the trading day. The difference between the two candles forms the opening range size. 

Why determining the opening range is so important? It’s so because the opening price range determines the future price action. When the price crosses the range, it is likely to continue in that direction. Intraday traders then use the breakout as the entry point.

How To Trade In Opening Range Breakout 

In simple words, the opening range breakout strategy means taking a position when price breaks above or below the previous day’s high or low. The following factors constitute critical parts of the ORB trading strategy.

Time Frame Selection

We have already discussed that opening range breakout is essentially a time frame trading strategy. Every trader has a different preference regarding time frame selection, which is alright. However, the most popular time frames are 15 minutes and 30 minutes frames because these are most effective. But some traders also prefer to stick to 10 minutes or 5 minutes charts, and that’s completely fine because the underlying principle of the ORB strategy remains unchanged irrespective of time frame.

Stock Volume Comes Into Play 

How would you decide if a stock is a good selection for trading? Follow the volume. Usually, stocks move in the direction of the broad market. But some stocks with a catalyst will breakout to create a range of their own. These stocks trade in high volume, which further attracts more traders to it. Intraday traders always look for stocks that indicate expanding volume. On a volume chart, expanding volume is characterised by wide-range candles.

You can identify these stocks by keeping a watch on stocks that record a high-volume during pre-market hours. Then look at the cause behind the high demand. If you can’t identify a concrete reason that could sway the market sentiment, stay away from those stocks. 

Developing Directional Bias 

Don’t we always hear trade in the direction of the market? It holds good for ORB strategy as well. Trading in bullish stocks, with a catalyst, is a simpler way to shift the odds further in your direction.  

You need to tap on stocks that are making maximum movement. Comparing that with the chart, you could then decide if the stock is worth trading.

An easy way to identify market direction is to establish the relative strength line trend, which you can calculate by dividing the stock price by the price of the broader market index.

Identifying Strong Breakouts 

The key factor to successfully trade with ORB trading strategy is to identify strong breakouts that will result in a successful trade. Novice traders may struggle to identify an entry point during opening range breakout strategy, but it’s not difficult to point. 

You need to confirm the breakout is strong and for that look out for narrow range breakout – a cluster of candles. The narrow range represents volatility contraction, and open range indicates volatility expansion. Together, the two describe profitable trading trends. 

Two popular narrow range patterns that traders prefer are NR4 and NR7 pattern. So, when the two emerge in the trading chart, followed by an open range breakout, the chances of profitability from the trade rises. 

Commonly, strong breakout arises in the VWAP region. If the trade is appearing outside in the VWAP region, it is better to avoid as there is a high chance that a whipsaw will occur.  

Thirdly, look for high volume nodes. We have already discussed that volume is a critical indicator of an opening range breakout. In more than 50 percent cases price reconsolidation happens around the high-volume node. So, if a breakout is occurring above the high-volume node, then it is a potentially fair trade.  

Executing Trade Using Opening Range 

Planning entry and stop loss in opening range breakout is reasonably simple. Here is how you can do it.

Depending on your selected time frame, you have to wait for the opening range to form and then take position after the breakout happens above or below the candle. 

When the market starts to move in the direction, you enter the market. However, before taking a position, confirm that the trend sustains and there is no reversal which will result in whipsaw. This is where a stop loss comes into play.  Placing a sensible stop loss will ensure that you will not lose much money when a whipsaw happens.  However, selecting the stop loss level will depend on your risk appetite. 

The Bottom Line

The opening hours in the market is the most crucial. It often gives unambiguous indications towards the day’s trading pattern. Intraday traders look for such signals to plan their trading strategy. Opening range breakout helps to build strong trading strategy by indicating an exact entry point.