Trading Opening Range Breakouts

In yesterday's post I discussed why the average daily range is so important when day trading the major currency pairs. Well today I thought I would discuss how you can use this information to help you trade opening / overnight range breakouts.

I personally use the quiet trading session between 00.00 and 06.00 GMT as the overnight trading range, although you can also extend this period to 08.00 if the price is still trading within a tight range up until that time. (I'm also referring here to the European pairs such as the GBP/USD, EUR/USD, GBP/JPY, EUR/JPY, EUR/GBP etc, although it may work on other pairs as well).

You don't get good trading set-ups every day, but what you are basically looking for are instances where the currency pair has been trading in a very tight range compared to it's average daily range. The logic behind this system is that when it does break out of this range and make a new high (or a new low), then there are potentially large points gains to be made if the price continues to move in this direction.

This system is very much a work in progress, but I've found that an opening range of no more than about 1/3 of the average daily range is just about perfect. So going back to yesterday's figures, we know that the average daily range for the EUR/USD is 177 points. Therefore we want to look for days when the opening trading range between 00.00 and 06.00 GMT (or 08.00 for even greater chances of success) is no more than around 60 points from the high point to the low point.

To demonstrate this breakout system, let me show you a chart of the EUR/USD from yesterday's trading session because this was a perfect example:

As you can see, the price traded within a tight range of just 55 points between 00.00 and 06.35 before breaking out of this range at 06.40. The price then raced upwards during the opening hours of the European trading session and had reached a peak of 1.3072 (the high point of the day) just after midday. Therefore this breakout could potentially have yielded around 140 points if you had entered a position on the close of the breakout candle, and you could certainly have closed out the position when the average daily range of 177 points had been reached.

There are many ways you can trade this system. You can enter as soon as the breakout candle closes or you can wait for a pull-back followed by a continuation pattern (which also happened during this particular breakout). You can close your position when the average daily range has been achieved or you could scale out of your position by closing half your position for say 30 or 50 points and letting the other half run for as long as possible or until the average daily range has been reached, moving your stop loss to break-even.

Talking of stop losses, the best policy is generally to either set it at the mid-point of the opening range or at the bottom of the breakout candle. You can always move it upwards as the price moves in your favour.

Either way I think you will find that this is quite an effective forex trading strategy because it targets large price moves whilst containing your losses if there is a false breakout. As I mentioned earlier, the opportunity to trade opening range breakouts does not arise every day because most of the time the opening range will be much higher than 1/3 of the average daily range, but they do provide high probability trading opportunities when they do present themselves.