We’ve decided not to write any fancy introduction about opening range breakout trading strategy. Instead of using various indicators, let’s start with an example and a picture:
Opening Range Breakout – Explained
The chart is zoomed out to the max for you to better see the opening range breakout. Notice how price tested several times the upper and the lower parts of the horizontal channel. This clearly shows us a great level of indecision in the market. It is not shown in the picture, but we were in an uptrend at the time the picture was taken. The fact that a range is forming (the gray box) and price cannot continue its move up but cannot go lower either, gives huge importance to the outer limits of the channel.
In the upper part of the channel, the buyers want to take the price higher, but fail because sellers offer a strong resistance. In the lower part of the channel, sellers want to take the price lower, but fail because buyers support the price. All this translates on the chart into several tests of the upper and lower part of the channel. Now, the upper and lower parts of the channel are very strong and whichever breaks first in a decisive manner will dictate the next move of the market.
In our example, the sellers won the battle and more sellers joined them because now, the direction of the market was pretty clear. The signal that the battle was won by the sellers is given by a strong bearish candle, piercing through the support level. We are not going to go into detail, but that candle is called a Marubozu candle. Its main characteristic is that it has no wicks (or shadows) and it’s a very strong bearish signal (in this case).
There are different ways to enter a trade with this strategy:
- Place a buy stop order 20-30 pips above the range and a sell stop order 20-30 pips below the range. We need to set the orders 20-30 pips outside the range to avoid a false break. When one of your orders is triggered, delete the other one and set a stop loss a few pips behind the broken level. Keep in mind that the amount of pips will change if you move to a higher timeframe
- Enter the market when a clear sign of a break appears. This requires a better understanding of candle formations and price action
Remember that all strategies can fail and never risk more than you afford to lose. Here’s another great read to further your opening range breakout understanding.
