Opening Range Breakouts in the FX Market

Breaking Through
Price Breakouts Can Allow You Follow A New Move With New Momentum. yuoak | Getty Images

Talking Points: 

Are Opening Range Levels Important

Which Range To Focus On

How To Trade the Opening Range Breakout

"You can either buy low in order to hopefully sell high or trade with the trend, but not both"

-Bill Williams, Trading Chaos

Many traders come into the FX market because of the rewards that are made available through the 24 hour nature of the market and the leverage allowed. However, the excitement and entrance to the market can precede a plan meaning that these traders come into the market with more hope than a plan, which can be dangerous.

While there are a lot of indicators out there, few allow you to be truly objective so that you know whether or not you're right.  Luckily for us, Opening Range Breakouts are one of the few that allows traders to be objective and trade with a bias while complementing the price action that happened at the end of the prior month. 

Are Opening Range Levels Important?

If nothing else, Opening Range levels allow you two objective points to build a viewpoint.  The high and low of the range over the given time frame gives you the opening range. Regardless of your chosen time frame, when you see a breakout that you decide to follow the opposite side will neutralize your bias. 

Opening Range breakouts are not a new approach. In fact, the method of looking for the first break of the day to join and build your bias on caused pit traders to coin the term, "10 O'Clock Bulls". The 10 O'Clock Bulls were those who would wait for the opening range to develop over the first 30 minutes of equities trading, 930am-10am and buy only if resistance was broken yet stand on the sideline if the opening range high isn't touched again.

This approach was popularized in Mark Fisher's book, The Logical Trader but not to be forgotten by the famed Tony Crabel who is known for introducing the concept to the masses. 

Which Range To Focus On

The range you focus on will depend a great deal on what type of trader you are. A day trader would feel at home looking into intra-session opening range breakouts like the Asian, London, or US session.

 A swing-trader could look to weekly opening range breakouts that takes the extremes of the first three geographic sessions of the week that are finished by mid-Monday morning in the US to build the opening range.  

Lastly, the longer-term traders can look to monthly or annual opening ranges, known as macro opening ranges.  The annual opening ranges are divided into the first two weeks of January and July. These two-week zones tend to do a good job of either capturing the high or low in a trending market. 

How To Trade the Opening Range Breakout

The preparation that goes into trading the Opening Range Breakout is in noting the direction of the prior trend, the extreme levels of the Opening Range to know where to enter and exit as well as understanding the trade size they may employ. This is a more active approach however, once the levels are defined entry orders or one-cancels-other orders can be placed to allow you to employ this strategy if you're not able to manage the trades live.

Naturally, breakout traders are not looking to buy the lowest tic or sell the top tic. Instead, as the name implies, a breakout system capitalizes on a break in the direction of the larger trend which has the potential of clearing opposing orders that could hold back price.

Once that level is broken in the direction of the trend, a trader can join the larger trend.

Of course, risk must always be managed and the other side of the range can provide you an exit point. For example, If you go long on an opening range resistance level being broken, you can use the opening range low or a few ticks below to be your stop loss level.