The Opening Range Breakout (ORB) is one of the most logical, time-tested and effective intraday trading strategies across all markets. The strategy was first popularized back in the late 1980s by traders like Larry Williams (see “Larry Williams: One with the market,” January 2017) and Tony Crabel, who formalized a rules-based approach in his seminal 1990 book “Day Trading With Short Term Price Patterns and Opening Range Breakout.” While many experienced traders are familiar with the concept by now, there are many interesting variations on and observations about how to use this classic entry signal in the stock and forex markets.
The setup: The opening range
As every trader knows, market-moving developments don’t stop at the closing bell. New geopolitical, economic and intermarket information continues to flow around the clock, even when a trader’s preferred market is closed. Because liquidity in the after- and pre-market sessions are notoriously low, the large institutions that drive prices prefer to wait for markets to officially open before placing their orders for the day.
As a result, the market open tends to be a very volatile and hectic period for trading, with traders absorbing the overnight news and catching up with the moves in other markets. It also often includes the release of high-impact economic data that can set the tone for the remainder of the trading day. Not surprisingly, this period is occasionally dubbed “discovery time,” when the new balance between supply and demand is determined.
For the purposes of this trading strategy, an instrument’s “opening range” is defined by its high and low over the first 30 minutes of the trading day. These levels often mark the initial areas of supply (resistance) and demand (support) for a given instrument. As a general rule, a breakout above the opening range high signals that bulls are growing more aggressive whereas a breakdown through the opening range low suggests that bears are in control of the market (see “Setting the table,” below).
If you polled 100 traders on their precise buy or sell triggers for an opening range breakout, you would inevitably get more than a dozen different answers. In general, though, it pays to keep things as simple as possible. Once the opening range is set, a trader could place an “stop entry order” — buy stop above the high and/or a sell stop below the low — if the market breaches either end of the range by the smallest quoted increment (typically $0.01 in stocks and 1 pip in the FX market). Once one of the entry orders is triggered, the other order is cancelled.
By waiting for a breakout beyond the established opening range, traders can increase the probability that they’ll be aligned with the day’s dominant trend. Intuitively, if a market is showing enough strength to break above the highest level set over the chaotic, high-volume open, it’s a strong sign that it could have enough strength to rally further throughout the day. And by entering on stops, the strategy has the potential to improve entries (see “Positive slippage,” below.)
The most important entry variable is time. This strategy seeks to enter relatively early into an instrument that’s expected to trend in the same direction throughout the day. Therefore, the best practice is to cancel the entry orders if they haven’t triggered in the first two hours of the trading day, or 90 minutes after the opening range is established.
Stop loss placement
Of course, an entry signal is only half a trade and won’t always work. Traders must manage the trade, including setting logical stop loss and profit targets.
The most straightforward and logical stop loss placement for an opening range breakout trade is at the opposite end of the opening range. In other words, if the buy entry is triggered, the stop loss would be set at the bottom of the opening range, and if the sell entry is hit, the protective stop would be placed at the opening range high. The opposite entry stop to what is initiated becomes the stop loss.
While this strategy is certainly logical, many traders find that it’s too conservative and costly. In most cases, a position that fails to maintain its breakout beyond the opening range over the first couple hours of the trading day is unlikely to suddenly resume trending strongly back in that direction, even if it doesn’t reverse all the way back to the opposite side. For this reason, many traders prefer to use the midpoint of the opening range as a stop loss level, balancing the risk of a whipsaw against an overly conservative, and costly, stop loss.
As with stop losses, the precise placement of a profit target for an opening range breakout trade is up for debate. Some practitioners prefer to use a set number of points, whereas others use a multiple of the instrument’s Average True Range (ATR). Indeed, some traders eschew specific profit targets entirely, instead choosing to close the trade out before the closing bell regardless of the exact price. If you are trading more than the minimum amount of shares (contracts with futures or dollar value in foreign exchange) you may wish to partially exit and move your stop to breakeven.
An ATR-based approach usually works best. Because this strategy seeks to take full advantage of strongly trending days, readers could look to set a profit target at 1X the 14-day ATR. Of course, a portion of the daily range is taken up by the opening range itself, so this means that the profit target is only hit when volatility is above average. If the profit target has not been hit by the end of the day, traders should look to close out the position ahead of the closing bell regardless; after all, there will be a new opening range setup and potential trade signal the following day. If you prefer to wait for the close, and if the trade has been profitable most of the day but not so much as to hit your target, you should move your stop to breakeven before the volatility of the close.
The opening range breakout in action
AAPL provided a textbook example of an Opening Range Breakout on Nov. 30. The stock saw a high volume surge to $112.20 at the open before fading back to set its opening range low at $111.52 at 9:56 a.m. At this point, an entry buy stop order would be placed above the high at $112.21, and a stop sell order would be placed below the low at 111.51 (see “Setting the table,” above).
“Getting in” (below) shows the sell entry would have quickly triggered, prompting the trader to go short and cancel the buy order. A protective stop loss would be placed at the midpoint of the opening range at $111.86. The 14-day ATR at this point was $1.90, so the profit target would be set at $109.61.
As the day proceeded, AAPL continue to grind lower. Ultimately, the stock failed to reach the aggressive profit target at $109.61. Nonetheless, the short could have been closed before the closing bell near $110.65 for a profit of 86¢ while risking 35¢, a nearly 2.5:1 reward/risk ratio (see “Taking profit,” below). If you chose to exit on the close, you would have earned an extra few cents at $110.52.
Of course, not all trades will work out quite as cleanly, but by following this time-tested strategy, readers can increase the odds of catching strong intraday trends while limiting risk in case of sharp intraday reversals.
Anecdotal observations and conclusion
On the all-too-often occasions when my father-in-law asks where the stock market is going on a given day, I tell him that its guaranteed to go up, down or sideways. Similarly, only three things can happen after an opening range breakout: The market could continue to trend in the direction of the breakout, the market can reverse and head in the other direction (a so-called “false break”), or the market may flatten out.
Years of trading this setup shows that the “average” week will feature two trend continuation days, one trend reversal day and two flat days, though this is by no means a guarantee and it often varies depending on the specific instrument traded. That said, this handy rule of thumb can help anchor readers’ expectations and potentially increase the strategy’s effectiveness.
The Opening Range Breakout strategy has gone through countless iterations and seen hundreds of variations during the years, but it remains one of the most popular intraday trading strategies for good reason. It may not be quite as good as true fortune teller’s “orb”, but outside of the paranormal, it may be one of the better ways to divine a market’s future moves.