Actively trading stocks during opening hours is typically extremely fast-paced and confusing, but there is also an opportunity for active traders, like day traders, to earn a significant profit if they can control their excitement. The Opening Range Breakout ("ORB") is a historically proven mechanical trading system that utilizes the increased trading volume created by the Opening Range.
If you want a straightforward, high-probability strategy for day trading that eliminates emotional triggers when making decisions, you have to learn about the ORB Trading Strategy; that is what this guide will provide. In addition to providing an Overview of what the ORB Trading Strategy looks like, this guide will also provide a step-by-step execution plan and an explanation of the important risk management techniques that traders must implement.
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What is the Opening Range Breakout?
The Opening Range Breakout is one of many different forms of technical analysis that day traders can use to determine which direction (up or down) a stock or index is most likely to move based on the trading activity during the opening range in the first part of the trading day.
The Core Concept: The Opening Range
The Opening Range consists of the high and low prices of the security during the first part of the trading day. This price range helps the trader to better understand where the market is going in the short term by indicating whether or not there was a difference in how the buyers and sellers felt about the asset's fair value when they each initially entered into this market together.
Common Timeframes: Although any time range can serve as an Opening Range, the most commonly used time ranges by traders using the ORB Trading Strategy are 5, 15, or 30 minutes. The 15-minute Opening Range is often the most common time frame used by traders because it reduces some of the initial trading noise associated with the opening range.
The Most Important Principle is that when the price breaks this head and shoulders formation and then closes above/below that initial range, there is a directional bias from either buyers or sellers for several hours.
Core Concept of the ORB Strategy
The Ideal Opening Range Breakout (ORB) Trading Strategy converts this volatility into a clear entry point. When an opening range has been formed on a chart, the purpose of this strategy is to be ready for entry at the point where the price has broken away from the original opening range.
The Long Position (Bullish Breakout) is triggered when the price breaks above the Opening Range High. A bullish breakout suggests that buyers have bought in large volumes with momentum.
The Short Position (Bearish Breakout) is triggered when the price breaks below the Opening Range Low. A bearish breakout suggests that sellers have been buying in large volumes with momentum.
The ability to identify true breakouts is essential to success in trading with the Ideal Opening Range Breakout (ORB) Trading Strategy. Volume will prove to be one of the best indicators for determining whether or not there is enough volume to verify a breakout that is considered a "fakeout" versus one that is considered a "false" breakout.
To learn more about important topics related to identifying market signals, you may find our guide very useful: What is a Candlestick Pattern? Explained to Beginners.
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Step-by-Step ORB Trading Strategy Execution
When trading using the Ideal Opening Range Breakout (ORB) Trading Strategy, discipline involves following a set of steps that should increase your odds of making profitable trades. You will need to take the time to learn and practice the Ideal Opening Range Breakout (ORB) Trading Strategy before attempting to apply it in a day trading setting.
Step 1: Define the Opening Range Timeframe
Determine which opening range you want to use and what timeframe to use (5-minute, 15-minute, or 30-minute). A 15-minute opening range works best for beginners because it has a good balance between speed of entry and reliability.
Step 2: Mark the High and Low
Mark the high and low price levels. When the timeframe for your trading range is over, you will need to draw two horizontal lines to indicate the high and low price levels that occurred within that timeframe. These two lines represent your opening range.
Step 3: Wait for a Confirmed Breakout
Wait for a confirmed breakout before entering a trade. When the price first breaks out of the opening range, it may not hold. Therefore, do not enter the trade until the price has closed outside of the range boundary. This step is critical to preventing false breakouts from occurring when trading using an ORB strategy.
To enter a long trade, wait for the price to close above the high opening range line before entering your trade.
To enter a short trade, wait for the price to close below the low opening range line before entering your trade.
Step 4: Validate with Volume (Advanced Filter)
Before entering your trade, make sure to check the volume at the time of the breakout. Ideally, the volume associated with the breakout candle and the two subsequent candles should be significantly higher (i.e., 1.5x to 2x) than the volume that occurred over the previous week. The volume confirmation will provide added confidence when trading the ORB strategy.
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Risk Management for ORB
Risk Management is an important aspect of High Volatility Strategies, including the ORB Trading Strategy, due to the potential for a single bad trade to rapidly erase any accumulated profits, therefore having severe consequences for future trading activity. Risk Management is the use of strict stop-loss and profit-taking rules to help minimize risk associated with trading ORBs.
1. Setting the Stop-Loss
To protect your capital, your stop-loss needs to be set at a point that supports your trade setup. For the Opening Range Breakout ORB, the most common or effective stop-loss point will be opposite the breakout range of the ORB in terms of support and resistance.
Stop-Loss for Long position: Set stop-loss just below the Opening Range Low.
Stop-Loss for Short position: Set stop-loss just above the Opening Range High.
This placement of the stop-loss gives you protection in the event that the breakout fails and the price returns to the previous range of consolidation, providing a controlled loss on your account.
2. Defining Profit Targets (Risk-to-Reward)
Disciplined traders will have a Risk-to-Reward (R:R) strategy for profit-taking. The ORB capitalizes on strong price momentum. Therefore, the standard is to seek a minimum of 1:1.5 or 1:2 R:R.
If your R risk factor is the distance from the entry point to your stop-loss, your first target should be 1.5 x R or 2 x R above your entry point.
Alternatively, you may set a profit target based on Technical Support and Resistance levels on the previous day's chart.
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Conclusion
Because it is straightforward and automated in the way that it works, the Opening Range Breakout (ORB) strategy is one of the top intraday breakout strategies that is widely used. The ORB trading strategy gives new traders a clear entry point, exit point, and stop-loss level; as such, this clarity is extremely valuable to them as they often have problems with controlling their emotions when making decisions.
By identifying your time frame, waiting for a candle closure, and using strict stop-loss rules, you can use the volatility associated with the market's open to your advantage.
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