Improve Probability for Opening Range Breakouts

Opening Range Breakout Strategy
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An Opening Range breakout refers to a specific time interval following the regular market open. You may for example use the first 15, 30 or 60 minutes of trading after the regular open. Various approaches to opening range breakout strategies were described by Toby Crabel. An example from his book “Day Trading with Short Term Price Patterns and Opening Range Breakout” is discussed below. To learn more, watch the video or continue reading below:

In this Indicator Spotlight we review an approach to improve the probability for opening range breakout strategies. 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. Specifically, a period of contraction will increase the likelihood for anopening range breakout strategy.

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 (yellow bars) precede trending markets

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.

Narrow Range Patterns:

Crabel describes the following methods to determine contracting market conditions:

  • 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.

Opening Range Trade Management:

Once prices break out from the opening range, you may enter a position in the direction of the move. Long positions at the breakout above the opening range high, short positions at breakouts 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, you are most likely not looking at trend scenario and the setup should be invalidated. Therefore, you may set a trailing stop at the open, following an initial departure from that level.

Profit targets can be placed at the50%, 100% and 200% extension levels of the Opening Range. Alternatively, one may also use at the 50%, 100% and 200% pre-session extension levels. When trading breakouts from within the pre-session range, the overnight high and low levels will represent the first areas of support / resistance. In such situations, you should place the initial profit target at those levels. The pre-session range and range extension bands are available with the premium version of the Opening Range indicator.

To start using narrow range patterns with your opening range breakout strategy, you may review the Range Analysis indicator here:

Other Indicators from our Library

A feature comparison between the standard NinjaTrader Indicators Library Opening Range and the Premium version is available here.

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.

All our indicators are available for NinjaTrader 8.