Opening Range Breakout Trade
The Opening Range Breakout Trade is a momentum trading strategy that is used within the first hour of the stock market opening (9:30-10:30 E.T.). This strategy has no pre-determined directional bias. In other words, when trading this strategy, you don't have to "guess" or predict which direction the market or individual stock is going to go, you simply set orders according to the strategy and you let the market decide which order it chooses to fill.
How is that possible?
The Opening Range Breakout Trade (ORBT) strategy is targeting the explosion of volatility that happens at predictable times in the market, and places trades when probability of a large move is heavily skewed in it's favor. The ORBT strategy doesn't relay on market direction as much as it does volatility. Though, this strategy is not delta neutral, ultimately it does relay on direction once the order is filled, but the difference is, we let the market decide whether we go long or short.
How is that possible?
The Opening Range Breakout Trade (ORBT) strategy is targeting the explosion of volatility that happens at predictable times in the market, and places trades when probability of a large move is heavily skewed in it's favor. The ORBT strategy doesn't relay on market direction as much as it does volatility. Though, this strategy is not delta neutral, ultimately it does relay on direction once the order is filled, but the difference is, we let the market decide whether we go long or short.
The strategy is simple, in the first hour of the market opening, volatility is drastically increased and the market has a high probability of making a quick and drastic move.
The Opening Range Breakout Trade Strategy does not try to predict what direction the market will move too, but rather attempts to capture the move the market decides to make.
The Opening Range Breakout Trade Strategy does not try to predict what direction the market will move too, but rather attempts to capture the move the market decides to make.
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The Basics...
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Step 1 Choose a stock, ETF, or futures that has a heighten volatility. (earnings release, news event, etc.) Step 2 Mark the high and low of the first 30 minutes of the market openings. Step 3 Set Buy orders at the top of the range, and Sell orders at the bottom of the range, and wait for the market to cross one of the barriers, triggering an Entry. Step 4 Set your Stoploss at the halfway point between the high and low of the opening range (first 30min high and low). *use a Fibonacci retracement tool to quickly identify stoploss, entries and targets. Step 5 Set Initial targets to the 1.272% (long) or -.27.2% (short) extension. Initial targets should be set to exit HALF of your initial order (in the example to the left, if you entered with 500 shares short of SQ, set initial order to exit 250 shares at initial/first target). Step 6 When price reaches the initial target exit half your original order, and move your stoploss to breakeven (entry point), to create a no loss situation. Step 7 Set secondary target to the 150% (long) or -.50% (short) to exit the remaining position. |
Probability
Lets back up a minute and discuss why this works. The ORBT trade is a successful strategy because it exploits volatility when probability is in your favor.
At any given time in the market, you could go long or short and you would have a 50/50 chance of that stock moving in your direction. If you randomly went long or short and set your stoploss twice the distance of your target, you would have 66% chance of winning that trade. HOWEVER, you would not be trading a profitable strategy. Most likely, you would win roughly 66% of the time but your losses would offset your winners to the point where you were trading a breakeven strategy and would slowly lose money via commissions, slippage and exchange fees.
In fact, you could randomly change your risk to reward ratio anyway you like and most likely would end up with the same results, as long as your entries were random. This is because the market is constantly adapting and eliminating arbitrage opportunities.
That is why you need a second element to create a winning strategy. The ORBT strategy plays on this probability and waits for volatility to increase the chances of the market making a sudden directional move. By waiting for volatility to increase, you can increase your odds of winning the trade.
Now lets break down this strategy, step by step, so that you can fully understand the mechanics behind it.
Lets back up a minute and discuss why this works. The ORBT trade is a successful strategy because it exploits volatility when probability is in your favor.
At any given time in the market, you could go long or short and you would have a 50/50 chance of that stock moving in your direction. If you randomly went long or short and set your stoploss twice the distance of your target, you would have 66% chance of winning that trade. HOWEVER, you would not be trading a profitable strategy. Most likely, you would win roughly 66% of the time but your losses would offset your winners to the point where you were trading a breakeven strategy and would slowly lose money via commissions, slippage and exchange fees.
In fact, you could randomly change your risk to reward ratio anyway you like and most likely would end up with the same results, as long as your entries were random. This is because the market is constantly adapting and eliminating arbitrage opportunities.
That is why you need a second element to create a winning strategy. The ORBT strategy plays on this probability and waits for volatility to increase the chances of the market making a sudden directional move. By waiting for volatility to increase, you can increase your odds of winning the trade.
Now lets break down this strategy, step by step, so that you can fully understand the mechanics behind it.
Time Frames
There are 3 different time frames that you can use the ORBT strategy, 5 minute, 15 minute, and 30 minute windows. Each window works exactly the same, obeying the same rules.
There are 3 different time frames that you can use the ORBT strategy, 5 minute, 15 minute, and 30 minute windows. Each window works exactly the same, obeying the same rules.
VERY IMPORTANT: Each trading window is completely independent! Risk management is the number 1 aspect of trading, do not take on more trades than your own risk management allows. You do not have to trade each window. These are the three times when the breakout strategy has proven to be effective. We highly recommend learning and practicing one time frame at a time until you have mastered it before trading multiple trade windows.
Moving forward, we are going to discuss the 30 minute Opening Range Breakout Strategy. The same rules apply to each strategy, but to keep things simply, were only going to discuss one time frame to avoid confusion.
Moving forward, we are going to discuss the 30 minute Opening Range Breakout Strategy. The same rules apply to each strategy, but to keep things simply, were only going to discuss one time frame to avoid confusion.
STEP 1: Finding a volatile stock
The amazing thing about the ORBT trade is that it works in all markets. The ORBT strategy has proven effective in the stock market, futures market, and the forex market. However, finding a device with heighten volatility will significantly increase the strategies effectiveness.
One simple method of finding volatile stocks is looking at the pre-market movers, high gainers and big losers are prime candidates for the ORBT strategy. Keep in mind, it doesn't matter if the stock has had a significant gain (or loss), the ORBT strategy does not have a directional bias heading into the market opening, as the stock could change direction at any moment.
There are many companies and website that offer this information. Finivz.com offers this information for free on its homepage. Feel free to use any screener that you want. Stocks with news driven events are also prime candidates for the ORBT strategy. Check out the Trending Stocks at StockTwits to see stocks that other traders are monitoring.
For the broader markets (S&P500, Nasdaq, Dow Jones, Russell 2000), the ORBT strategy is a viable strategy on most days, although it is not recommended to use the ORBT strategy on the days leading up to, and after major holidays such as Thanksgiving, Christmas, and New Years, and other major holidays as volume and volatility are low.
Keep in mind that this strategy works best in devices (stocks, options, futures, etc) that have high liquidity. WE DO NOT RECOMMEND USING THE ORBT STRATEGY ON PENNY STOCKS AND OTHER LOW LIQUIDITY DEVICES.
The amazing thing about the ORBT trade is that it works in all markets. The ORBT strategy has proven effective in the stock market, futures market, and the forex market. However, finding a device with heighten volatility will significantly increase the strategies effectiveness.
One simple method of finding volatile stocks is looking at the pre-market movers, high gainers and big losers are prime candidates for the ORBT strategy. Keep in mind, it doesn't matter if the stock has had a significant gain (or loss), the ORBT strategy does not have a directional bias heading into the market opening, as the stock could change direction at any moment.
There are many companies and website that offer this information. Finivz.com offers this information for free on its homepage. Feel free to use any screener that you want. Stocks with news driven events are also prime candidates for the ORBT strategy. Check out the Trending Stocks at StockTwits to see stocks that other traders are monitoring.
For the broader markets (S&P500, Nasdaq, Dow Jones, Russell 2000), the ORBT strategy is a viable strategy on most days, although it is not recommended to use the ORBT strategy on the days leading up to, and after major holidays such as Thanksgiving, Christmas, and New Years, and other major holidays as volume and volatility are low.
Keep in mind that this strategy works best in devices (stocks, options, futures, etc) that have high liquidity. WE DO NOT RECOMMEND USING THE ORBT STRATEGY ON PENNY STOCKS AND OTHER LOW LIQUIDITY DEVICES.
For example, in this scenario a Buy Stop order will execute an entry order when price crosses through the $369.84 price. If price was to have sold off to the lower barrier, the Sell Stop order would execute a short sell order at $366.39
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Step 2: Defining the trade barriers
Step 2 is a critical step for properly executing the ORBT strategy. The rules are simple, keep track of the high and low of the associated idle time (9:30 to 10:00 eastern time for the 30 minute ORBT window). The high and the low form the trade barriers (entries). If price breaks Above the top barrier, then ENTER LONG. If price breaks Below the bottom barrier, then ENTER SHORT. Step 3: Set Entry Orders
At the end of idle time, set a Buy Stop order at the top of the range, and a Sell Stop order at the bottom of the range. Stop orders is an order type that executes are price crosses through the barrier. Not to be confused with a Stop Loss order where the trade is exited when price breaches through your stop price. As soon as one of the orders is filled, you can cancel the opposing ordering. For example, in this scenario when price crossed the long barrier, you could cancel the short sell order at 366.39 which will release the capital requirement for that order. Also note that only the first breaches are valid. If price stops out (or meets targets and returns to the opening trading range), secondary breaches are not valid entries, and trading them is not recommended.. Next step, set your stops and targets. |
If you are using ThinkorSwim, simply copy the setting and click "Save as default." You can always reset to factory if you choose too.
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Step 4: Set Stop Orders
The next step is to set your stop. Your stop will be the halfway point between the long entry barrier and the short entry barrier. You can quickly identify the stop by using a Fibonacci Retracement tool (a standard drawing tool on most platforms) . Simply draw from one corner of the trading range to the opposing corner and use the 50% retracement level. This same tool can also be tweaked to identify targets as well (more on that later). Step 5: Set Initial Targets Now that stops are in place, set your initial targets. Initial targets should be set to the 1.272% extension of the trading range (-.272% for short sell orders). **Keep in mind, the -.272 and the 1.272 are exactly the same, and it all comes down to which corner you decide to start the drawing at. If you set the 100% line at the bottom, the 1.272% will be your target. if you set the 0% line at the bottom, the -.272% will be your target. Customizing the Fibonacci Retracement tool.
Customizing the Fibonacci retracement tool is a very simple way to quickly find entries, targets, and stops. All you have to do is customize the levels in the default Fib retracement settings. If you are using the Think or Swim Platform, copy these settings and save as default (you can always revert back to factory settings if you choose). Custom Settings: -.50 (Short Sell Secondary target) -.272 (Short Sell Primary Target) 0.00 (Short Sell Entry line) .50 (Initial Stop, Long and Short) 1.00 (Long Buy Entry Line) 1.272 (Long Initial Target) 1.50 (Long Secondary Target) Step 6: Adjust Stop-Loss Once you have entered the trade, one of two things can happen, either the trade goes against you and you get stopped out at the 50% retracement (closing the trade) or price will reach your first target, the 1.272% extension. Step 7: Set Secondary Targets Once price has met the initial target, and you have adjusted your stop to match your original entry, set an order to exit the remaining position at the 150% extension. At this point price will either reach your secondary target, completing the trade with max profit, or will return to your entry point, stopping you out of the trade with partial profit. A note about time.. If price is stuck between your stop and target past 11:00 a.m. ET, then I recommend exiting the trade. After 11:00, volatility and volume significantly decreases because the European stock market closes, retail trading significantly decreases, and professional firms begin taking lunch. Basically, its not an optimum time to trade, and chances of profiting are difficult to predict. In fact if price is trapped in a narrow range, chances are, the move has already been made. High frequency algorithms and marker makers will keep the stock trading, and price will drift around with no conviction or predictability. Whether you have a small loss, or a small profit, it is best to exit the trade and try again the next day. |
Risk Management
It is imperative to understand that a successful trading strategy alone will not make you a successful/profitable trader. Risk management is THE MOST IMPORTANT ASPECT OF TRADING. Never violate you risk management plan, never place a trade when you cannot afford to take a full stop out! Seriously, if you fail trading this strategy, it will be because you took trades when you could not afford the full stopout. Full stopouts will happen, they are part of the trading plan. The ORBT strategy only works when it is strictly followed.
Furthermore, if you miss an entry, do not try to enter at a different price. There will always be another stock to trade, its best to wait for the next time frame, or even the next day, rather than entering a trade with sub-optimum entries.
It is imperative to understand that a successful trading strategy alone will not make you a successful/profitable trader. Risk management is THE MOST IMPORTANT ASPECT OF TRADING. Never violate you risk management plan, never place a trade when you cannot afford to take a full stop out! Seriously, if you fail trading this strategy, it will be because you took trades when you could not afford the full stopout. Full stopouts will happen, they are part of the trading plan. The ORBT strategy only works when it is strictly followed.
Furthermore, if you miss an entry, do not try to enter at a different price. There will always be another stock to trade, its best to wait for the next time frame, or even the next day, rather than entering a trade with sub-optimum entries.
Got questions?
If you have any questions about this strategy, please feel free to email me and ask us anything. We are here to help you
If you have any questions about this strategy, please feel free to email me and ask us anything. We are here to help you
ORBT Indicator
While not required to trade the ORBT strategy, the ORBT indicator does help you tremendously when monitoring multiple stocks at once. If you are interested in acquiring the indicator, we sell it for a one time fee of only $39.95. Click here to be taken to the indicator store.
Disclaimer: Breakout Trading Co. and its affiliates take no responsibility for your actions. Securities trading is speculative and extremely high risk, do not invest or trade any capital that you cannot afford to lose entirely.