The London opening range breakout strategy is an ultra-flexible trading system that can improve your market timing. Trading breakouts around the busiest trading hours alongside with the smart money can be a very lucrative business if you know how to correctly read the price action.
Did you know that the opening range can give you the high and the low of the day like 35% of the time? Based on this you can define a breakout trading strategy around this statistic, you can easily manage your risk and set your profit targets.
Basically, you can become a proficient trader!
If you have been trading for any length of time you should know that one of the most important things in trading is being consistent. You can only achieve this consistency if you have trading rules put in place that you can follow.
The opening range breakout strategy has been mostly popularized by stock index day traders. However, we have adapted the rules of the ORB strategy to capitalize on price moves in the Forex market as well.
Throughout this trading strategy guide we’re going to outline the trading rules of the London opening range breakout strategy. More importantly, we’re going to highlight the history and from where it originated the London breakout pattern so you can have a better understanding of the price action.
Let’s get started!
What is the Opening Range Breakout
The opening range is considered to be the first minutes of the new trading session. In the case of the London session that’s the first trading minutes of the London session. Naturally, the opening range will have a high and a low which will allow you to draw a resistance and a support level.
Usually, the first 30 minutes of the opening are considered to be the opening range breakout. However, there are some variations that can be used depending on the market (stocks, futures, Forex or cryptocurrency) you trade and your preferred time frame.
All you can do is to draw a support at the lowest price at which your instrument traded in the first minutes of trading. Then you also take your second line, which is your resistance line and you draw that line at the highest price at which your instrument traded in the first minutes of trading.
And that is what constitutes the opening range.
The opening range breakout is defined as the trade taken when the price breaks above or below the opening range. The breakout trading strategy can be used as a swing trade because we assume the price will continue to move in the direction of the breakout for the rest of the day.
The ORB pattern was discovered by Toby Crabel and popularized in the book “Day trading with short term price patterns and opening range breakout”
Usually, the first minutes of the London session is the time in which the market is digesting the news from the Asia session. The London open is also the time in which the institutional traders are back at work and need to execute their orders to make some money for the current day.
All of that action is reflected in the opening range.
This will define the market initial sense of bullishness and bearishness.
We don’t like the probabilities of this pattern and we constructed our breakout trading strategy to fade the opening range breakout pattern.
See below:
London Opening Range Breakout Strategy
The false breakout trading strategy works best on the Forex currency market because we can make use of the previous trading session range. This is a key element for trading breakouts with our proprietary trading system.
If you like to trade small, quick impulsive market movements you can do so with the London opening range breakout strategy.
Even though fading the opening range breakout works with most major currencies we found out through extensive backtesting that the GBP/USD tends perform better and give us more profits. We’ve made some considerable changes and improvements to target a much higher profit target and to make the breakout trading strategy work.
The first adjustment we made is to look at the Asia trading range instead of the opening range. This will give us more price information to work with. We define as the Asia trading range the price action between Asia open 00:00 GMT to 7:00 GMT.
The high and the low of that particular time slot is what constitute the Asia trading range.
See chart below:
Once you have the Asian trading range defined all you have to do is to wait for a breakout to happen.
Usually, the Asia trading range will attract lots of stops above and below the consolidation. And these stops are like an open target for the smart money that needs more liquidity to fill in their big orders. So, naturally the smart money are going to first run these stops and trigger them which is what causes the false breakout.
The basic requirement for this setup to work is to see a surge in volatility. Actually the London opening range works best when the volatility is higher.
When the London institutional traders are coming in the market at 8:00 GMT we can see an attempt to break higher. However, the breakout quickly fades away signaling that the smart money are stop hunting and this is simply a false breakout.
See chart below:
But, how do we fade the opening breakout?
We need some clear entry rules to trigger our trades. Since any breakout can easily turn into a trend development we need to wait for the price action to break inside the trading range and post a close below the top resistance level.
You should enter a short position at the opening of the next candle.
See chart below:
If you want to have an even higher probability of success rate then you need to look for one more key element that will dictate the nature of the breakout. As we mentioned earlier volatility is a key aspect of false breakouts.
If the move preceding the breakout is accompanied by high volatility, and if the move starts to fade away at the same speed then we can ascertain with a high degree of probability that we’re in the process of a false breakout.
On a price chart this translates into an inverse “V” shape type pattern. If the false breakout happens at support level the price action will look like a “V” shape type pattern.
See chart below:
The false range breakout will also give us a good place to hide our protective stop loss. Trading breakouts profitably also requires using stop loss to minimize the losses in case the trade goes against us.
In our case, the false breakout will usually generate a swing high were we can place our protective stop loss.
See chart below:
Knowing when to take profits can make a big difference between winning a trade and giving back all your profits. As an exit strategy we can measure the Asia trading range and project it to the downside
The Asia trading range can be calculated by measuring the distance between the support and resistance lines and then placing the target same distance from the support line in the direction of the breakout.
See chart below:
The breakout trading strategy is a pattern based system that doesn’t require the use of any technical indicators. If you can master the London open breakout system you can based your entire intraday trading approach on these trading principles.
If you want to learn more advanced concepts on day trading to help you capture bigger moves using the same London opening range breakout strategy then continue reading.
We’re going to introduce an extraordinary important technique for exiting your day trades.
Adjustments to the London Open Breakout Strategy
For this purpose we’re going to use the Average Daily Range indicator or the Average True Range (ATR).
The Average True Range indicator will help us achieve two important things:
- Making sure that we’re trading in tune with the current price action
- Avoid overly aggressive profit targets
- Maximize your profit potential
The Average True Range is the number of pips that any particular currency pair moves within a trading session on average. Since we’re day trading the markets we want to look at the most recent days to calculate the average daily range.
In this regard we’re using a 7 period for the ATR indicator.
This means that the ATR will take each of the previous 7 days their respective daily range (basically, how many pips that currency pair has ranged during that day) and calculate the average daily range of the previous 7 days.
From a statistical point of view we can expect that particular currency pair to move the same amount of pips as the ATR. Obviously, it can move a little bit more or a little bit less than the ATR.
What we need to take from the ATR reading is that we can expect the currency pair to move somewhere in the neighborhood of its ATR.
Let’s now go through another trade example and put the ATR at work for us. Obviously, we’re going to use the ATR in combination with our favorite London Open Range Breakout strategy.
For the purpose of this example we’re going to use the EUR/USD chart.
To find the Average Daily Range of the previous 7 days, we’re going to apply the ATR indicator on the daily chart.
See chart below:
If the ATR indicates that the ERU/USD exchange rate has moved on average 62 pips over the past 7 days, you don’t want to push your profit target beyond that level. We want to trade within what is statistically feasible and reasonable.
If we were to use Asia trading range projection target then we would have only aimed for a 21 pips target. That’s three times less then what we can achieve by adjusting our profit target using the ATR indicator. We’re effectively leaving lots of profits on the table if we don’t adjust our exit strategy.
See chart below:
The ATR is very efficient in avoiding being too greedy with our profit targets but at the same time helping us maximizing our profits.
Conclusion – Trading Breakouts
In conclusion, the breakout trading strategy works around the London open but using the previous trading session range to define the breakout. It’s important to understand how the London open can give you the high or the low of the day and a clear market direction that you can trade on.
The core principle behind trading false breakouts is that is that the trading range established during the Asia session sets a neutral zone that will attract stops on both sides of the market. Since the smart money are always in search of liquidity these stops become targets and once the price breaks either side of the range they are triggered and reversal can happen.
This breakout trading strategy works because the markets range 80% of the time and only trends 20% of the time. And inside those trading ranges there are many false breakouts on both sides of the market that you can capitalize on.
Thanks for reading! We’d love to hear your thoughts on this strategy, so drop us a line at support@tradethemarketforprofit.com
-The TMP Team