The Opening Range Breakout Trading Strategy: A Detailed Guide
The opening range breakout (ORB) is one of the most popular intraday trading strategies utilized by active traders and day traders. It aims to capitalize on high probability breakouts during the first hour of the trading session.
In this comprehensive guide, we will break down how experienced active traders can effectively utilize the opening range breakout strategy in their own intraday trading.
What is the Opening Range Breakout?
The opening range breakout focuses on the price action and range established in the first 5-60 minutes of the trading session. This initial period is widely watched by intraday traders for signs of potential momentum.
The two main components of the opening range are:
- The opening range high – The highest price reached during the opening range period
- The opening range low – The lowest price reached during the opening range period
Once this opening range is established, traders look for breakouts above or below the defined range to enter new positions.
A break above the opening range high triggers buy orders. A break below the opening range low triggers short sell orders. The assumption is that the opening range breakout will lead to follow-through momentum in the direction of the break.
Key Benefits of Trading Opening Range Breakouts
There are several advantages of using the opening range breakout strategy:
- Structured entries – Entry signals are clearly defined based on the break of the established range high/low. This removes indecision.
- High probability – Breakouts from key support/resistance levels have a higher probability of follow-through.
- Catching momentum – Opening range breakouts allow traders to capitalize on momentum right from the opening bell.
- Risk management – The opening range high/low provides clear areas for stop losses to be placed.
- Versatility – The strategy can be used across stocks, forex, futures, and other liquid markets.
When implemented correctly, the opening range breakout strategy provides experienced traders with an edge in catching intraday trends.
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How to Trade Opening Range Breakouts
Here are the key steps involved in trading opening range breakouts:
1. Identify the opening range
Most active traders look at the first 5, 15, or 30 minutes of the session to identify the opening range. For example, the first 15 minutes from 9:30 am to 9:45 am may be used on the stock market.
Some traders also watch the first hour (9:30 am to 10:30 am) as a wider range. The shorter period generally leads to more breakouts.
2. Mark key levels
For example, if the opening range on the 5-minute chart is $25.20 to $25.60, those prices are the key levels.
3. Wait for the breakout
For upside breakouts, buy when the price trades above the opening range high. For downside breakouts, sell short when the price drops below the opening range low.
4. Place stop loss order
Once entered into a position after the breakout, place a protective stop loss. This defines and limits risk on the trade.
A common approach is to place the stop loss order just outside the opposite end of the opening range.
For example, if buying the upside breakout, place the stop loss just below the opening range low.
5. Book profits
Have a profit taking strategy ready for when the opening range breakout trade is live. This could involve trailing stops, profit targets, or visual chart analysis.
Disciplined traders will book profits methodically according to their trading plan rules. Letting profits run is often counterproductive.
Optimizing the Opening Range Breakout Strategy
To optimize entries and increase profitability from the opening range breakout strategy, traders should focus on:
- Volume – Breakouts on heavier volume have a higher probability of follow-through. Monitor real-time volume on breakouts.
- Price action – Smooth breakouts that do not immediately reverse back into the range are preferable. Watch for false breakouts and traps.
- Momentum indicators – Indicators like the RSI, stochastics, and MACD can be used to confirm momentum on the breakout. Divergences warn of potential false breaks.
- Previous day high/low – Range breakouts around previous day support/resistance levels have a higher chance of continuation.
- News events – Fundamental news events and data releases can bolster breakout momentum. Be aware of scheduled announcements.
- Currencies/indexes – Breakouts in line with the overall market and currency movements often gain traction.
Proper optimization ensures opening range breakout trades have the highest probability setups according to current market dynamics.
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Common Opening Range Periods
While the opening range can be customized, there are some common time frames used by active traders:
- First 5 minutes
- First 15 minutes
- First 30 minutes
- First 60 minutes
The shorter duration ranges like 5 or 15 minutes lead to more breakout opportunities but can suffer more false breaks. The longer 30 or 60 minute opening ranges have fewer trades but may capture stronger breakouts.
Active traders will experiment to find the optimal opening range for the market and asset class they are trading. This can change based on volatility.
Managing Risk on Opening Range Breakouts
As with any trading strategy, effective risk management is crucial when trading opening range breakouts. Here are some guidelines:
- Use stop loss orders on every trade to limit potential losses. Place stops just outside the opposite end of the opening range.
- Trade smaller position sizes to avoid taking on excessive risk. Breakouts can fail so risk capital appropriately.
- Focus on the most liquid markets with ample volatility. Illiquid markets increase the risk of slippage on entries.
- Beware breakouts during low volume trading ranges. This increases the odds of false breaks and traps.
- Have a risk-reward ratio of at least 1:1 on all trades. Aim for greater reward potential than the risk taken.
- Avoid overtrading by being selective with only the best breakouts. Overtrading often leads to account destruction.
With proper precautions, the intelligent trader can thrive using the opening range breakout strategy.
Real World Examples of Opening Range Breakouts
To see the opening range breakout strategy in action, let’s look at some real chart examples:
AUDUSD 15 Minute Chart
AUDUSD Opening Range Breakout
This AUDUSD chart shows the 15 minute opening range established during the first 15 minutes of the Asian session. The opening range high and low are marked by the horizontal dotted lines.
Price consolidates within the range for a few 15 minute candles before breaking above the opening range high. This triggers long entry orders. The breakout gains momentum and leads to a prolonged uptrend lasting several hours.
S&P 500 Futures 5 Minute Chart
S&P 500 Opening Range Breakout
This chart of the E-mini S&P 500 futures contract shows a downside break of the 5 minute opening range low during the US session.
The break below the defined range triggers short sell entry orders. The momentum accelerates lower throughout the day after this initial opening range breakout.
GBPUSD 1 Hour Chart
GBPUSD Opening Range
This GBPUSD hourly chart highlights how the opening range can be used on higher time frames. The one hour range is marked by the dotted lines encompassing the first hour of the London session.
When price breaks below the low of this opening range, short positions are triggered. The bearish momentum results in a sizeable move lower over the next few hours.
These examples demonstrate how experienced active traders utilize the opening range breakout strategy across different time frames and asset classes. Tuning into the opening range breakouts is a valuable tool in a trader’s arsenal.
Opening Range Breakout Conclusion
The opening range breakout is a time-tested trading strategy utilized by active traders across various markets. By focusing on the high-probability breakouts during the opening period, traders are able to capitalize on momentum and trends.
The key to success is proper identification of the opening range, disciplined entry on the break, and effective risk management. With the right optimization and robust risk controls, this strategy provides an edge to experienced intraday traders.
The opening range breakout works well across forex, futures, stocks, and indices. Traders should backtest it thoroughly and find the configurations that fit their trading plan. While no strategy is perfect, the structured nature of opening range breakouts gives traders an advantage if implemented correctly.
Overall, this is a strategy worth learning and applying for traders interested in momentum-based intraday trading. By combining solid risk management with a high-probability entry technique, the opening range breakout offers a valuable tactic for active market participants. With the right amount of skill, discipline, and practice, it can become a steady source of profits.