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Sunday, 31 March 2013

Opening Range Breakout (ORB) Trading System

Opening Range Breakout (ORB) is a commonly used trading system by professional and amateur traders alike and has the potential to deliver high accuracy if done with optimal usage of indicators, strict rules and good assessment of overall market mood. This system is applicable only for intraday trading.

ORB trading has several variations practiced by traders all over the globe. Some traders trade on a significant breakout from opening range, while others trade immediately on opening range breakout. Time window for the trades also varies from 30 minutes to 3 hours.

Over a period of time observing and trading Indian markets, I have devised with the below system suiting our markets. Below method is both a scalping and a trending system combined into one, hence it is possible to take the advantage of quick moves and trending markets with multiple lots of trades.


Trading Strategy

Quite Simple and straightforward. Rules in the next section needs to be adhered to increase the success rates dramatically.
Any stock creates a range in the first 30 minutes of trading in a day. This is calling Opening Range. The highs and lows of this timeframe is taken as support and resistance.

1. Buy when the stock moves above the Opening Range high.
2. Sell when the stock moves below the  Opening Range low.

PLEASE NOTE THAT THE ABOVE SYSTEM IS GENERIC, THE RULES BELOW WILL MAKE IT A SPECIFIC SYSTEM. IF YOU ARE FOLLOWING THIS SYSTEM, PLEASE FOLLOW ALL THE RULES FOR BUY / SELL STRICTLY.


General Rules – Applicable for both Buy and Sell:

  1. Opening range is defined by the high and low made in the first 30 minutes.
  2. 5 min chart with 5 EMA and 20 EMA used for making trading decisions.
  3. Entry should be made only on close of the 5 min candle outside the opening range.
  4. 20 EMA is one of the key technical indicators used in this system for trend trading. Stop loss is always kept at 20 EMA for riding the profits.
  5. Volume confirmation – Breakout candle should show increase in volume.
  6. Optional confirmation- One of the two indicators - MACD or Stochastics should be favorable for the trade. (We have four indicators in Simplified Technical Analysis - Moving Averages, RSI, MACD, Stochastics. The idea here is at least two indicators should confirm the trade.). This is purely optional condition to enter trade.
  7. Respect support and resistance levels. Do not buy just below a resistance  or sell just above a support.
  8. Always trade with 2 lots and book 50% as soon as you see few points profit. Second lot will be used for taking advantage of days trend.


Rules for Buy

  1. Stock should be trading above the 20 EMA line before the breakout.
  2. Buy when the 5 minutes candle closes above the opening range.
  3. 5 EMA line should be above the opening range at the time of breakout.

Where to keep Stoploss

Initial Stoploss – Low of the Opening Range.
Trailing Stoploss - As the stock moves in your direction  and you are in profits, book 50% , trail the stoploss at 20 EMA. A close of 5 min candle below 20 EMA confirms exit.

When to book full profits

When the 5 min candle closes below the 20 EMA in the case of longs.


Rules for Sell

  1. Stock should be trading below the 20 EMA line before the breakdown.
  2. Sell when the 5 minute candle closes below the opening range.
  3. 5 EMA line should be below the opening range at the time of breakout

Where to keep Stoploss

Initial Stoploss – High of the Opening Range.
Trailing Stoploss - As the stock moves in your direction and you are in profits, book 50% , trail the stoploss at 20 EMA. A close of 5 min candle above 20 EMA confirms exit.

When to book full profits

When the 5 min candle closes above the 20 EMA.


High Probability Trade Setups

Below additional conditions will give high probability of success:
  1. The Opening Range breakout is above previous day’s high for buy.
  2. The Opening Range breakout is below previous day’s low for sell.
  3. Trade is in the direction of higher time frame charts (15 min /30 min).
  4. Overall Market is moving in the direction of the trade.
  5. Opening range breakout happens after brief period of consolidation.

Important Additional Points
  1. If the opening range is too wide, better do not trade ORB, since the SLs will be very far in our system. You can use other trading systems in such a case.
  2. Avoid Opening Range Breakout trades in case of a heavy news flow day. ( Like Inflation, Manufacturing, Policy decisions etc.). Use other trading systems once the market settles down after the  news.


Opening Range Breakout  Trading Examples (Nifty Stocks March 26 – 28, 2013)

Close to 20 ORB trading examples are given below for educational purposes. These trades are based on the above trading system following all rules. Point 6 in General Rules - Optional confirmation is not considered in these trades.
  1. DLF – ORB Trades
  2. HERO MOTORS- ORB Trades
  3. ICICI BANK – ORB Trades
  4. L&T – ORB Trades
  5. ONGC- ORB Trades
  6. SBI – ORB Trades
  7. TATA STEEL – ORB Trades

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