Opening Range Breakout: A Powerful Day Trading Strategy
Opening Range Breakout is one of the most powerful day trading strategies employed by traders.
DISCLAIMER: Please note that this is not investment advice. This article is for educational purposes only.
What is an Opening Range?
An opening range is simply the high and low for a given period after the market opens. This period is generally the first 15, 30, or 60 minutes of trading. The opening range is one most important chart patterns to make money in the stock market.
Why is Opening Ranges Important?
Opening ranges are important to traders because they can indicate sentiment and price trends for the day. Traders often monitor opening ranges before or after periods of heightened volatility.
Benefits of Trading Opening Range Breakouts
- They can be a simple way to trade
- They can help identify sentiment
- They can indicate price trend
- They may work well during periods of heightened volatility
- Breakouts tend to work better on stocks with high relative volume
How to Trade Opening Range Breakouts?
An ORB is a fairly simple strategy that involves taking a position when the price breaks above or below the opening candle's high or low for the selected time frame. When trading ORBs, it's important to look for other key levels and confirm whether the stock is oversold or overbought. The breakouts also work better on stocks that have high relative volumes.
Here is a rough outline of how someone may want to trade ORB on the long side:
- Enter long when prices move above the previous high with volume confirmation
- Stop loss would be placed just below the recent low
- Take profit at 1:1 risk reward ratio or better
Shorting Rules would be vice versa
- Look for areas where there is clear resistance such as previous highs
- Place stop loss just above resistance level
- Take profit at 1:1 risk reward ratio or better
Since this is a mostly used as a day trading strategies, positions if open is always exited right before market close.
The key to success with this strategy is picking the right stocks. You want to look for stocks with good liquidity and a tight spread. The reason you want stocks with good liquidity is so you can get in and out of trades quickly and not have to worry about slippage. When it comes to the spread, you want it to be tight, so you don’t have to worry about getting stopped out prematurely. A tight spread will also allow you to place your stop loss closer to your entry point, giving you a better risk/reward ratio. Finally, you want to look for stocks that have a high amount of relative volume. This means that there is a lot of interest in the stock, which increases the chances of it making a big move. All of these factors will increase your chances of success when trading ORBs.
Conclusion:
Opening range breakouts can be a great way to make money in the stock market, but only if you trade them correctly. You need to pick the right stocks and use stops and limits to minimize your risk and maximize your profits. If you can do all of that, then trading ORBs can be a great addition to your trading arsenal.
But most important of all in order to build confidence in any trading strategy requires the ability to define the precise rules of a strategy, backtest them historically to validate when it works and when it doesn't, and iterate and tune (without over-optimizing) to play on the strengths of the strategy. It is equally important to know when not to trade a particular strategy. And then follow the rules strictly. While all this can be done manually, it is extremely time-consuming and counterproductive. Also, it risks one from getting confirmation bias - i.e., looking only at positive outcomes. Institutions and hedge funds employ a large team of coders and data scientists to create an algorithmic trading system that gives them a significant process edge.
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