The Open Range Breakout Currency Trading Strategy for the Scalper
The whole purpose of conducting any form of analysis – be it technical, fundamental or statistical – is to try to identify higher probability trading opportunities. One such strategy is to use a European opening range. This strategy will usually focus on EUR/USD, but it can be applied to any of the major European currencies.
The forex market is open 24 hours a day (Sunday evening through Friday evening ET), but market activity in a particular pair is not necessarily constant all the time. The forex market is usually divided into three main sessions:
<> London: Open 3AM ET, Closes 12PM. (noon) Eastern time
<> New York: Opens at 8am local time, closes at 5pm. local time
<> Tokyo: Open 6pm. Eastern time, closes at 3 a.m. ET during the winter months; Open 5 pm. ET Close at 2 a.m. ET during the summer months
How Open Range Breakout Strategy Works
Here are the basics:
>> Identify the high and low in the half hour before the London open (2:30 AM to 3 AM ET), then look for a breakout of this range +/- 10 pips or 1/10 of the daily Average True Range (ATR) And keep above / below this level for 10 to 15 minutes. You are trying to figure out the direction of the “flow” for the rest of the day.
>> From there, look to manage this bullish or bearish bias by focusing on the 1 minute, 2 minute or 5 minute charts and using a combination of moving averages (13-SMA, 144-EMA, 169-EMA) and oscillators (RSI Stochastic, and CCI).
>> Other factors to include are major news announcements (usually in an effort to avoid) and time of day (when major markets are open/closed, option expiration, fixes, etc.).
Noteworthy times include:
<> <> Main Option Expiration:
> New York Expires: 10 a.m. local time
> Japan Expires: 3 p.m. local time
<> <> Coin Fixes:
> London Fix: 4 p.m. local time
> Tokyo Circuit: 8:55 a.m. local time
<> <> Currency futures: International Monetary Market (IMM) closes at 3 pm. Eastern time
<> <> US Stock Markets: Open 9:30 AM ET, Closes 4 PM. Eastern time
Ideally, if the price is struggling near these events (usually spotted by a bullish/bearish divergence with an oscillator), it might be wise to reduce the position size early on. In addition, this type of approach may help reduce the emotional side of trading, since there is an area that can be identified to see where you are wrong (the other side of the breakout high/low).
Opening range breakout strategy in action
In this example, the EUR/USD made a significant low during the 2:30am-3am eastern time frame (which was preceded by a bullish RSI divergence with the price) and rose shortly thereafter. EUR/USD looked comfortable above the 2-minute 144/169-EMA, while the 13-period simple moving average (SMA) remained above the exponential moving averages, and the RSI continued to find support in the key 40/45 region . Hence, there was no reason to move away from the intraday bullish bias.
In addition, as we explained earlier, another factor to consider is the time of day. In the forex market, most London traders tend to close their positions between 11 AM and noon ET, while New York traders close between 4 PM. And 5 pm. Eastern time. Accordingly, price often sees a final push at the end of the day, followed by profit taking (usually spotted by bullish/bear divergence with oscillator) near these times of the day.
Sure enough, after 11AM ET in our example, the EUR/USD rose again to finally reach the intraday ATR target of 1.2927, which was followed by a bearish divergence with the RSI before noon ET.
Here are some general notes regarding possible opening range scenarios per week (these are just general results – not to be expected):
1. Two days a week: You won’t do much (finish almost flat)
2. Once a week: false break and possible reversal
3. One day a week: a decent move (50 to 70 pips from the highs/lows)
4. 1 day a week: ATR target reached (pip amount is generally equal to Average True Range using a 14-day period)
If the ATR is achieved earlier in the week, the probability of it happening twice in the same week is significantly reduced. If it does, it’s usually in opposite directions.
As a forex trader, when volatility starts to rise, it’s usually the time you want to trade currencies, not sit on the sidelines. As a result, if this strategy does not hit the ATR target after Monday, Tuesday or Wednesday of a particular week, it may be reasonable to pay attention to this tactic on Thursday and Friday.
Conversely, if the ATR is reached early in the week, it may be wise to be on the lookout for potential market failures in the latter half of the week as they could be a sign of a false break and/or a possible direct reversal.
Most importantly, the goal is not to think, “Wow, I need to implement this strategy right away”, but instead to analyze the way you approach the market on a daily or week-to-week basis think about whether you take the time sufficiently into account – Because time may actually be more important to a trader than price!