The Opening Range Breakout ORB Strategy

The opening range breakout strategy (ORB) has been around for a long time. It was developed in the 1980s by Toby Crabel and explained in his book under the catchy title: Day Trading with Short Term Price Patterns and Opening Range Breakout. After publishing the book, Crabel apparently regretted giving away his secrets and tried to buy all available copies.

As a result, the books are now rare, and pricey …

Here we’re going to take a look at the basic principles of an ORB setup, and whether this trading technique still works today …

What’s so important about the market open?

Market opens are the high-energy, adrenaline-fueled trading slots of the day. Generally, more shares change hands in that first hour than in any other period of the day, and Crabel noted that the first ten minutes after the open could give us the bias of direction for the next few hours, and even for multi-day moves.

As traders, that’s a very tempting prospect.

Take a look at this hourly FTSE chart and note the volume peak at 8am each morning …

These periods offer strong moves, good trading volume and tight spreads – all things we like for our trades. But these can be highly volatile periods – so we need some caution and some risk-management rules.

What’s the Opening Range?

For Crabel, the opening range happened in the first 10 minutes, but other traders have found different time periods work better for them. The idea is that it’ll be the first 10–30 minutes. Crabel advocated jumping in quickly, but bear in mind that the sooner we get in, the more likely we are get caught up in some of that turmoil around the opening bell, when high volatility can bump us out before we’ve had a chance to let the market run – so exercise some caution around this.

Let’s say we’re looking at the initial 15 minutes of trading. So, on a 5-minute chart, that’ll be the three candlesticks after the open …

Here’s yesterday’s opening range on the FTSE …

If the price breaks out of that opening range to the upside, we take a long position. If it breaks out to the downside, we take a short position.

Adding some nuance to the ORB strategy setups

The ORB strategy is beautiful in its simplicity, but there’s plenty more to these setups that just entering on the break.

Something Crabel talks about a lot is cycles of contraction and expansion. In simple terms, this means days when the market is trending, and when prices are consolidating – and how the two relate to each other.

So, to get the very best breakout setups, you need to understand what an Inside Day is and what Narrow Range days are. It’s not tricky – and just means switching to a daily chart …

We’re looking at the previous day’s candlestick (i.e. the candle for the day’s trading that’s closed, ahead of the open we want to trade). And we’re looking for Inside Days and Narrow Range days …

An inside day will present as an ‘inside bar’ candlestick – it means that the day’s trading range is within the trading range of the previous day.

Narrow range candlesticks can break out of the price range of previous bars, but will have a smaller overall range than the previous candlesticks.

An NR4 bar will have the smallest range of 4 days ….

And an NR7 bar will have the tightest range of 7 days …

Why do we care about NRs and IDs?

The narrow-range days and inside days are important because they fit our breakout trades into a cycle of contraction and expansion. After a contraction, we will tend to see stronger trending days as the market ‘expands’.

Crabel noted this effect as very significant – with breakouts offering seven-times the profit potential after contractions.

So, if we focus in on breakout trades after an inside day or an NR day, we can expect to see the biggest market moves from our breakout.

Trade parameters for Opening Range Breakout strategy

So, what format should our trade setup take?

The basic setup would position our stop at the other side of the opening range, with an equidistant profit target …

However, I’d recommend letting the trade run further, with a trailing stop.

And there are plenty of ways you may wish to amend this …

• wait a few ticks after the breakout before entering for a more secure entry
• using a % of the breakout range for your stop distance, to give a better reward-to-risk ratio (especially if you’re not trading after an ideal Inside Day or NR day setup, so won’t be expecting the same scale of move from your breakout)
• consider scaling in and out.

Other factors to bear in mind for ORB trades

• Give a limited amount of time for the breakout to happen – if it hasn’t happened in the first hour of trading, there is no opening breakout momentum, so the setup is void.
• Watch for support and resistance levels that could affect your trade setup and avoid looking for trades that will butt up against these issues.
• Look at strong trending behaviour (on a longer timeframe) – is there a trend line or a moving average line that’s pushing price to move in one direction? If so, only take a breakout in that direction.
• Is there economic data coming out around the open time – this can trample all over your carefully made trade set-up, so avoid these news events.
• ‘Market open’ times aren’t as defined as they were in the 1980s, with a lot of activity in the pre-open period. So you may want to consider looking at a wider period for the post-open range, encompassing trading activity going back to 7am or earlier.

The nice thing about these setups is that they give clear, rule-based entries, with easy-to-read parameters. But there are still lots of ways to enhance a breakout trade, whether it’s on the UK markets or the US open in the afternoon.

Let me know what you think and about other ways you trade the opening bell …