ORB strategy: trading the opening range breakout

What an opening range breakout is

The opening range is the high and low a market makes in a fixed period after it opens, usually the first 15, 30 or 60 minutes. The idea, first popularised in the stock index futures pits and written up by Toby Crabel in the early 1990s, is that the first part of a session is where overnight orders and early opinions get settled. Once price leaves that range with conviction, the side that was wrong has to close out, and the move can carry on for hours.

Stocks and futures have a clear opening bell. Spot forex trades around the clock from Sunday evening to Friday evening, so there is no single open. What it does have is session opens, the times when a large financial centre starts trading and volume jumps. The London open, with the first hour taken as 07:00 to 08:00 UK time, and the New York open at about 13:30 UK time are the two that matter. Our page on forex trading sessions shows how the hours fit together.

ORB sits in the breakout family. It is a cousin of the previous day high break and retest, but faster: it does not wait for a retest, and it takes its levels from today's first hour rather than from yesterday.

Step one: mark the opening range

Choose your session and your range length, and keep both fixed. Changing them from day to day turns a testable strategy into hindsight.

• London ORB: the high and low of 07:00 to 08:00 UK time, on GBP/USD, EUR/USD or gold.
• New York ORB: the high and low of 13:30 to 14:00 UK time, mostly used on gold and US stock indices.

A 60-minute range gives fewer, more considered breaks. A 15-minute range gives earlier entries and more false starts. The 30 to 60-minute range is the usual starting point, and this page uses 60 minutes for London.

Then check the size of the range against what the market normally does in a day. Take the 14-day ATR on the daily chart. If the opening range is more than about half the daily ATR, much of the day's move may already have happened, so skip it. If it is smaller than about a tenth, the range is so narrow that ordinary noise will break both sides. On gold with a daily ATR of $30, that means trading ranges between roughly $3 and $15.

Step two: the entry, stop and target

Once the range is set, watch the 5-minute chart. The trade is the first side that breaks.

Entry

Buy at the close of the first 5-minute candle that closes above the range high, or sell at the close of the first one below the range low. Some traders use a stop order a little beyond the range instead, which gets in earlier but fills on every spike. The close is slower, and it filters out more of the one-candle pokes through the level.

Stop

Put the stop at the midpoint of the opening range. If price gets back to the middle of the range, the break has failed. The alternative, the far side of the range, gives the trade more room but doubles the risk for the same position size.

Target

Take profit at twice the risk. Close anything still open at the end of the session (16:30 UK time for London) whatever its result.

In the gold example, the London first hour sets a range from $2,398.40 to $2,404.60, a range of $6.20, comfortably within the filter. The midpoint is $2,401.50. A 5-minute candle closes above the high and the entry is $2,405.50. The stop at the midpoint is $4.00 away, and the target of $2,413.50 is $8.00 away, twice the risk. Price dips back towards the range high once, holds above the midpoint, and reaches the target before lunch.

Position size and the one-attempt rule

Gold moves in dollars, not pips, so work out the size carefully. On most brokers one lot of gold is 100 ounces, so a $1 move is worth $100 per lot. A $4.00 stop therefore costs $400 per lot. With a $5,000 account and 1% risk, you have $50 to lose, which is 0.12 lots. On GBP/USD, a range of 30 pips gives a 15-pip stop at the midpoint; $50 of risk is then about 0.33 lots. The position size calculator handles both.

A 2 to 1 trade breaks even at 33% before costs. The spread on gold is often 20 to 40 cents at the London open; on a $4 stop that is up to a tenth of the risk on every trade, so check it before you test anything.

Take one attempt per day. If the first break fails and stops you out, do not reverse into the other side, and do not re-enter the same side. Many ORB variants allow a second trade, but the first rule to learn is that a day which breaks both ways is a range day, and range days are not for breakout strategies.

When the opening range breakout fails

ORB has one structural weakness: false breaks. Price closes beyond the range, you enter, and within half an hour it is back inside and through your stop. It happens most often on days with no news and no clear trend, when the session open brings a burst of orders but no follow-through.

The chart shows the pattern on EUR/USD. The range runs from 1.0830 to 1.0850. A candle closes above it and the entry is 1.0853, with the stop at the 1.0840 midpoint. Price stalls a few pips higher, falls back into the range and takes the stop, then carries on through the range low. The one-attempt rule matters here: reversing short after the stop would have looked clever this time, and would have been a second loss on the many days when price then turns up again.

Other situations to skip:

• A high-impact release inside the first two hours. The release, not the range, will decide the direction, and spreads widen into it.
• Bank holidays in the UK or the US, when the session open brings little volume.
• Ranges outside the size filter. These are the days most likely to produce no move or a whipsaw.
• Breaks late in the session. If neither side has broken by 11:00 UK time, there is no trade for London that day.

How to backtest an ORB strategy

ORB is one of the easiest strategies to backtest by hand, because the rules leave almost nothing to judgement:

1. Choose a market and a session, for example gold and the London first hour. Go back six months on the 5-minute chart.
2. For each day, mark the 07:00 to 08:00 high and low, check the size filter against that day's daily ATR, and note any release due.
3. Record the first close beyond the range, the entry, the midpoint stop, the 2R target, and which was hit first, or the price at 16:30.
4. Charge the real spread and commission, and record the skipped days and the days with no break.

Look at the average win against the average loss, the longest run of losses, and whether the results come from a handful of big trend days or are spread evenly. Then try one change at a time, such as a 30-minute range or a far-side stop, on the same data. More detail on doing this without fooling yourself is in how to backtest a trading strategy.