Opening Range Breakout Strategy

Opening Range Breakout Strategy

Various approaches to opening range breakout strategies were described by Toby Crabel’s in his book: “Day Trading with Short Term Price Patterns and Opening Range Breakout”. In this Indicator Spotlight we looked at a way to improve the probability for opening range breakout strategies. Specifically, we’ll look at narrow bar range analysis of daily bars. To learn more, watch the video or continue reading below:

The market is constantly changing from a period of movement to a period of contraction, and then expanding again. Determining market conditions that precede trending days can therefore indicate higher probability when trading opening range breakout strategies. Crabel describes the following methods to determine contracting market conditions:

Narrow Range Patterns:

  • IB – The Inside Bar: The IB pattern is defined as a bar that has range which is completely encompassed by the previous bar’s range. The prior bar’s high is higher than the current bar’s high and the prior bar’s low is lower than current bar’s low.
  • IB4 – Narrow Range Inside Bar: The IB4 pattern is a bar that has range which is completely encompassed by the previous bar’s range with a range that is narrower than the previous three bars’ ranges compared individually.
  • DI5 – The Narrow Range Double Inside Bar: The DI5 pattern is an inside bar that is preceded by an IB4 bar.
  • NR7The Narrow Range Bar: The NR7 pattern is defined as a range which is narrower than any of the previous 6 bars.
  • IB7The Narrow Range Inside Bar: The IB7 pattern is defined as an inside bar with a smaller range than the prior 6 bars 
  • 2NRThe 2 Bar Narrow Range: The 2NR pattern is the narrowest 2 bar range relative to any two bar range within the previous 20 bars. 
  • 3NRThe 3 Bar Narrow Range: The 3NR pattern is the narrowest 3 bar range relative to any three bar range within the previous 20 bars. Both 2NR and 3NR pattern represent a period of contraction that can occur during volatile as well as in consolidating market scenarios.

The Range Analysis indicator also comes with the option of displaying Wide Spread and Outside Bars. In the following however, we will look at how to combine narrow range patterns with the opening range.

Looking for Consolidation

From a psychological perspective, short term and retail traders tend to ignore markets that consolidate. However, it is exactly these scenarios we should be looking for in order to position ourselves. Again, narrow range markets tend to precede trending days.

Opening Range Breakout Strategy with Narrow Range Analysis
Narrow range days precede trending days 

Specifically, Crabel applied the above patterns on daily charts when trading opening range breakout. The assumption is that a new trend will align with the direction of the opening range breakout.

Opening Range Trade Management:

Trades are therefore entered in the direction of the breakout. Long positions at the breakout above the opening range high and shorts at the breakout below the opening range low.

Opening Range Breakout Strategy
Opening range with trend confirmation from the Ichimoku Kinko Hyo

Once the market has moved away from the the open, it should not return to this level. If is does, it is most likely not a trending day and the setup should be invalidated. Therefore, you may set a trailing stop at the open, following an initial departure from that level.

You may consider profit targets at pre-session high/low levels, alternatively at the 50%, 100% and 200% pre-session extension levels. Extension levels are available in our premium version of the Opening Range indicator.

To start using narrow range patterns with your opening range breakout strategy, download via the link below:

A premium Opening Range version is available for NinjaTrader 8. A feature comparison between the standard Indicator Library Opening Range and the Premium version is also available.

Finally, you may combine an Opening Range Breakout Strategy with trend filters, support / resistance and volume analysis. For example, aligning setups with a higher timeframe trend filter, such as the Adaptive Laguerre. For support / resistance levels you may review Fibonacci lines or our Session Tools. Specifically, you may review Daily Pivot Point Levels as applied by Mark Fisher, in his approach to the Opening Range Breakout. Finally, our Relative Volume indicator can help you identify increasing / decreasing volume and filter out noise signals. The Indicator Spotlight also looked at how to confirm breakout signals when the cumulated relative volume is above average.