Open-range breakout strategies are one of the most essential reversal and continuation chart patterns for capturing a move or reversal in the first hour. The first hour of the trading day is the most lively and dynamic, as this is when you can make the most money rapidly. However, without a trading plan, you may lose because the first hour is the most volatile time frame during the trading day.

In this post, we will define an open-range breakout strategy, explain how it works, and show you how to trade with one.

What is Open Range Breakout Strategy?

The opening range is the range of highs and lows for a specific period after the market begins, which is usually the first 30 or 60 minutes of trading. It is also one of the most essential chart patterns for profiting in the stock market.

During this time, we must identify the day’s highs and lows, as well as pre-market highs and lows, as these levels act as a magnet for price action after the market opens.

The market’s opening hour is associated with high trading volumes and volatility, and this time of day gives numerous trading chances. Traders utilize the open range breakout method to create entry opportunities as well as predict and forecast price activity for the day.

Understanding Open Range Breakout Strategy

Because of the importance of the open and the possibility of non-random price movement, the open, and particularly the opening range, provides us with numerous opportunity to develop trading methods.

Trading the open range breakout strategy simplifies matters because it provides us with definite entry and exit positions, but there is no ambiguity about where to place our stop.

An open range breakout strategy is exactly that: a break from the initial range, which you would define differently depending on your period and testing. When the approach first gained popularity in the 1990s, the opening range was the first hour of trading after the market opened.

As time passed and traders gained access to faster data feeds and worked on shorter time frames, some chose to define the opening range as the first half-hour, 15 minutes, or even one minute in some situations.

Trading With Open Range Breakout Strategy

There are numerous ways to approach the stock market’s opening bell; let’s look at some open-range breakout trading strategy:

1. Gap reversal

Most frequently occurring on the weekends when the market is closed, gaps are price breaks. With the Open Range Breakout Strategy, gaps are reversed when the starting price of the currency pair moves in the opposite direction as the gap.

For example, if USD/EUR closed at 0.7 over the weekend and opened in the opposite direction on Monday at a high of 2, this is referred to as a bullish gap and signals traders to enter the trade. A negative gap, on the other hand, occurs when the currency price breaks above the previous day’s price range high.

Furthermore, the stop loss placed between this range will assist their traders in minimizing trading risk, and profit objectives can be calculated based on the distance between the gap’s high and low price.

2. Gap Pullback

A pullback happens when a currency pair’s price behavior diverges from its long-term price behavior; for example, if a currency pair has been bullish in the long run, a gap pullback would signify a temporary dip in prices. When the market is bullish or bearish, you can use gap pullbacks and the ORB Strategy to locate optimal buy or sell signals.

Furthermore, when a bullish gap appears on a currency pair chart, the price swings in the other direction and declines. Once the downtrend has been established, a short order can be placed immediately after the price breaks out in the opposite direction.

Furthermore, if a bearish gap is identified on the currency pair price chart, the price goes in the opposite direction and rises, and once the uptrend is confirmed as the prices continue to rise, a long order can be put immediately after the price breaks out in the opposite direction.

3. Early Morning Open Range Breakout Strategy

You can trade the Early Morning open range breakout by focusing on the magnitude of the gap in the currency pair’s price chart and keeping a watch on its high or low breakout. After spotting the market gap, you can trade in the same direction as the breakout as soon as it occurs.

This method is implemented in the initial 20 to 30 minutes of the market opening since markets are extremely volatile at this time, and the currency pair price’s distance from the high or low price indicates if you can enter a buy or sell position.

Tips To Trade With Open Range Breakout Strategy

The tactics discussed above are just a starting point, and while there is some statistical relevance to market behavior on the open, trading just on it is likely to produce average returns. We all know that there is no such thing as a free lunch; rarely can you simply Google a trading technique, follow a few steps, and have a winning trading approach.

However, there are other steps you must do to increase your odds and keep you out of bad situations.

1. Trade Stocks in Play

Stocks often move in lockstep with the broader market, and if you opt to trade Google stock solely because you want to trade a huge tech name, Google will most likely move in lockstep with the S&P 500, so you’re essentially simply buying beta every day.

Every morning, an easy strategy to establish a watchlist of stocks with catalysts is to just look at which stocks have high relative volume and large price moves during pre-market, and then look at what is causing it: is it an earnings release, news, dilution, or something else? Examine the stock’s news in your news feed and recent SEC filings; if you discover nothing, it’s best to avoid the stock because you can’t tell why it’s moving.

2. Have a Directional Bias

Establishing a directional bias in the stocks you trade is one of the finest methods to shift the odds further in your favor, and perhaps you locate a stock with a significant catalyst: it just disclosed a favorable earnings surprise.

Based on this, you should only trade on the long side, and if the stock does move on earnings, it will most likely be upward. If the stock falls, it’s obviously not a good idea to take that short position.

Takeaway

Trading the Open Range Breakout approach can assist you in identifying good buying and selling opportunities, allowing you to place winning trade orders. Breakouts are also more effective on stocks that have a high relative volume for that time frame, whether it is 5 minutes or 30 minutes. Look for setups in which the opening range bar opens above VWAP and then closes below.

FAQs

1.  What time frame is typically used for the ORB strategy?

The time frame for the ORB strategy varies, but it’s commonly applied to shorter time frames like the first 15, 30, or 60 minutes after the market opens. Traders choose a time frame that suits their preferred trading style and the market’s volatility.

2.  How do I identify the high and low of the opening range?

To identify the opening range’s high and low, observe the price movements during the specified time frame after the market opens. The highest price reached within that time frame becomes the high of the opening range, and the lowest price becomes the low.

3.  What’s the significance of trading the ORB strategy?

Trading the ORB strategy allows traders to capture potential early price movements resulting from strong market momentum at the opening bell. Successful ORB trades can offer quick profits, especially when there’s a strong breakout.

4.  What types of markets are suitable for the ORB strategy?

The ORB strategy can be applied to various markets, including stocks, forex, commodities, and indices. It’s most effective in markets that experience significant volatility and liquidity during the initial trading hours.

5.  What risk management techniques should I use with the ORB strategy?

Risk management is crucial. Set appropriate stop-loss orders to limit potential losses in case the breakout fails to materialize. However. never risk more than a small percentage of your trading capital on a single ORB trade.