Opening Range Breakout (ORB) is a particular price action that is taken to be an indicator to enter into a trade.
The fundamental elements of an ORB trading strategy are best demonstrated by taking an equity market with typical trading hours of 08.00 -16.30. The high and low price levels of stock ABC are recorded over the opening five minutes (08.00 – 08.05) and in our example the high during those five minutes is 78.54 and the low price is 77.26. Any price action after 09.05 that takes the price over 78.54 is seen as an ORB breakout to the upside and is considered a signal to buy. The principle is applied in the same way to a breakout to the downside where a new lower price below 77.26 would be a signal to sell.
Time horizon: Positions are typically held intra-day so are sold prior to market close; apply Price Action Rules.
Stop losses: Buy trades would have stop-losses set at the low of the current day and sell trades would have stop losses set at the high of the day.
Target price: 2:1 or 3:1 ratio to stop loss cost.
Catalysts: The occurrence of some kind of news event that is seen as a catalyst for the break out is seen to be supporting the signal to trade.
Overnight Gap: The difference between the previous day’s closing price and the current days opening price should be considered. If stock ABC had a previous closing price of 76.74 and opened trading at 09.00 at a higher price (77.72) then the overnight Gap was ‘bullish’. In our example, a bullish overnight gap in ABC supports the ORB signal to buy. An ORB signal that is in the opposite direction to the Overnight Gap means you are being given mixed signals and would discourage entering into a trade.
Volumes: The greater the trading volumes, the stronger the trading signal. Diagnostic tools supplied by broker platforms will offer the chance to monitor volumes. In the below example the breakout candle is to downside and is associated with a sizeable uptick in volume. The signal to sell is borne out by the price continuing to fall during the rest of the trading day.
Source: IG Index 20181113
The example we chose is fairly simple and explains the fundamentals of the strategy but of course there are a range of factors to consider which will improve understanding and thereby hopefully improve profitability.
Time intervals: Our example used 5 minute time intervals. Whilst this is a popular choice other trader use others such as 1, 15, or 30 minutes.
Other events: Any diarized event that is likely to bring about increased trading volumes can be used as a base for trading ORB. Major reporting events such as the release of US Non-Farm Payroll data will generate spikes in trading volumes.
The theory behind OBR is that markets are busier at certain times of day and therefore price movements during those times are an indication of wide-held sentiment and therefore give an indication of future price direction.
ORB trading strategies are widely known, are intuitive in nature, and to some extent self-fulfilling. If for example the price of a stock follows the required pattern to trigger an ORB trade on the upside, then the associated widespread buying will push the price upwards. Even if you are holding back on actively trading an ORB strategy it is worth understanding how they work thereby avoiding the risk of unknowingly betting against them.