Finance:Opening range breakouts

The Opening Range Breakout (ORB) is an active day trading strategy that involves taking a position when a price breaks above or below the previous candlestick high (for buying long) or low (for selling short).

Fig.1 Conceptual illustrations of where a trader would enter into a trade and set the stop loss when using the ORB strategy for going long

The strategy can be used for trading most financial assets such as taking forex, futures, crypto, or equities when the trading asset's prices break below or above a certain high or low of the n-minutes candlestick (if n=5, it is called 5-min ORB for example). The opening range price is usually happens during the first hour of the market trading hours. This strategy is often used because it can generate quick profits, with traders looking to capitalize on the volatility that can occur at the beginning of the trading day.[1]

Strategy Definition

As shown in Figure 1, this strategy usually involves identifying the high and low points of a price during the first n-minutes of trading, and then buying or selling when the stock breaks out of this range. A more simplistic version of this strategy can be obtained by buying or selling at the open of the second candle in the same direction of the first n-minute candle.

Profitability and Research

In a study in 2023, Andrew Aziz and Carlo Zarratini investigated the profitability of the 5-min Opening Range Breakout (ORB) strategy during the period of 2016 to 2023 implemented in QQQ. This period encompasses two bear markets and a few events with abnormal volatility. Their results suggest that with the proper use of leverage or leveraged products (such as 3x leveraged ETFs), day trading ORB can empirically produce significant returns when compared to a standard buy and hold strategy on benchmark indexes in the US public equity markets (Nasdaq or NYSE). The resulting portfolio would have earned an outstanding return of 1,484% during the same period of 2016 to 2023, while an investment in the QQQ ETF would have earned 169% annualized.

File:Orb tqqq.jpg

A comparison between the equity curve performance of the ORB portfolio that day traded the TQQQ ETF (both long and short) and the equity curve performance of the portfolio that passively utilized a simple buy and hold strategy in QQQ and TQQQ. Gray highlighting has been used to show when there were bear markets.

Considerations

• Price: One of the first rules of ORB trading is that candlestick size is the main concern. Traders should avoid trading ORB if the first candleastick is small, or has huge wicks.
• Money management: Another decisive factor of ORB trading is not the timing of the trade or the indicator, but rather the decision of how much to trade over the course of the breakout.
• Risk control: Cut losses is the rule. This means that during periods of higher market volatility, the trading size is reduced. During losing periods, positions are reduced and trade size is cut back. The main objective is to preserve capital until more positive price trends reappear.
• Rules: OBR can be both for going long and selling short. Price and time are pivotal at all times. This technique is based on an analysis of fundamental supply and demand factors.