A breakout of the opening range is the most popular strategy for day traders. Today we’re going to look at what it is and how to trade it.
The opening area of the day sets the tone for the rest of the day and in order to calculate it we need to take the opening high and low, which can generally be anywhere from 15 minutes to 30 minutes or even 1 hour.
The high and low of the previous day are also important price zones that must also be taken into account when calculating the range.
The diagram below is from alphabet (GOOGLE).
On June 6th, 2021, the stock opened bullishly, making a high of $ 2,428.19 in the first 15-minute timeframe from the previous day’s closing price of $ 2406.
So we can set the opening range to be $ 2,406 – 2,428.19 as indicated by the arrow on the chart.
A breakout from the opening range can be defined as the breakout of the price from its opening range to continue its movement in that direction.
For example, after breaking the high of the range, the price continues to move higher.
If the stock breaks the low in the range, it falls below Selling pressure.
Trading the breakouts of the opening range offers fixed entry and exit points and the stop loss can be determined by the trader based on his Risk exposure.
With this strategy, the trader goes long or short on a stock when the high or low determined by the opening range is broken.
Such a strategy may seem simple, but it requires a lot of tweaking to go through Backtesting.
Backtesting a strategy builds trust, and it needs to be done over the past few years to streamline and improve the parameters for the strategy, such as: –
- Selecting the time frame to be used for determining such a range, which can be anywhere from 15 minutes to 30 minutes or even 1 hour.
- The entry point after the breakout, which can be closing the candle or waiting for a pullback candle to initiate trade.
- The minimum target for the trade, that is, the length of the range.
- A stop loss that can be set as half of the target, taking into account the risk / reward ratio.
- The exit criterion, which can be a break in a trend line / or a break in a 5-day SMA or VWAP.
- Other parameters such as minimum volume criteria for initiating a breakout trade.
Backtesting optimizes the parameters for the strategy and sets the tone for building up trading in the live market.
Calculating the breakout is the most important part of such strategy.
The chart below from Alphabet Inc Class A (Demokratie) shows that after breaking the high ($ 2,428.19) of the range, the price climbs to $ 2,453.
It is also important to identify an actual outbreak and not get caught by false outbreaks.
The graphic below shows American Eagle Outfitters (AEO), which opened with a gap up on May 26, 2021, with the opening range set at ($ 33.27 – $ 35.32) over a 15 minute timeframe.
The price then tried to break the opening range but failed trying to hit the lower volume. The wrong ORB led to a sell-off from this price level.
When trading the ORB, it is imperative for the trader to identify the false breakouts and avoid such trades.
The various parameters like moving average, VWAP, volume, etc. can come in handy for identifying and trading ORBs with good volume.
When trading with ORB, entry, stop loss, target and exit become vital for traders to gain momentum after the trade has become profitable.
The graphic below shows Nvidia Corporation (NVDA) on May 14, 2021.
The opening range defined for the day would be ($ 549.55 – 555.81) on a 15 minute time frame.
Traders can go long if the price exceeds the range at the end of the third 15-minute candle at $ 557 with a stop loss at $ 553.72 and a minimum target of $ 562 with a risk / reward ratio greater than 1: 1 breaks through.
Because after the outbreak, the trend continues bullish and the trader can ride the momentum very well by using the bullish trendline as his exit criterion to continue profitable trading and thus his exit with the break of the trendline will be around $ 570.
The ORB strategy with a good breakout often offers an incredibly good reward compared to the risk. Traders can use additional parameters to increase their chances of success.
Trading open range breakouts involves several steps such as: –
- Identifying the range when opening markets.
- Formulation of a breakout strategy after backtesting with optimization of various parameters.
- Recognize and avoid false breakouts.
- Identify good ORB trades and initiate a trade.
- Ride the profitable ORB trade or exit with a small stop loss if there is no momentum or reversal after the breakout.
Disclaimer: The information above is for For educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are unfamiliar with exchange-traded options. All readers interested in this strategy should do their own research and seek advice from a licensed financial advisor.