The whole purpose of doing any form of analysis — whether it’s 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 typically focus on EUR/USD, but it could be applied to any of the European majors.
The forex market is open 24 hours a day (Sunday evening through Friday evening Eastern time), but market activity in a given pair is not necessarily consistent throughout. The forex market is typically divided into three major sessions:
London: Open 3 a.m. Eastern time, close 12 p.m. (noon) Eastern time
New York: Open 8 a.m. local time, close 5 p.m. local time
Tokyo: Open 6 p.m. Eastern time, close 3 a.m. Eastern time during the winter months; open 5 p.m. Eastern time, close 2 a.m. Eastern time during the summer months
How Open Range Breakout strategy works
Here are the basics:
Identify the high and low during the half-hour just prior to the London open (2:30 a.m. to 3 a.m. Eastern time), and then look for a breakout of this range +/–10 pips or 1/10 of the daily Average True Range (ATR) and maintain above/below this level for 10 to 15 minutes. You’re trying to detect a direction of the “flow” for the remainder of the day.
From there, look to manage this bullish or bearish bias by focusing on one-, two-, or five-minute charts and using a combination of moving averages (13-SMA, 144-EMA, and 169-EMA) and oscillators (RSI, stochastics, and CCI).
Other factors to include are major news announcements (usually in efforts of avoidance) and the time of day (when major markets open/close, option expirations, fixings, and so on).
Noteworthy times to be aware of include the following:
Major option expirations:
New York expiry: 10 a.m. local time
Japan expiry: 3 p.m. local time
Currency fixings:
London fix: 4 p.m. local time
Tokyo fix: 8:55 a.m. local time
Currency futures: International Monetary Market (IMM) closes 3 p.m. Eastern time
U.S. equity markets: Open 9:30 a.m. Eastern time, close 4 p.m. Eastern time
Ideally, if price is struggling near these events (typically spotted by a bullish/bearish divergence with an oscillator), it could be prudent to reduce the position size ahead of time. Additionally, this type of approach may help to minimize the emotional aspect to trading, because there’s an identifiable area to know where you’re wrong (the opposite side of the breakout’s high/low).
The Opening Range Breakout strategy in action
In this example, EUR/USD made an important low during the 2:30 a.m. to 3 a.m. Eastern time timeframe (which was preceded by an RSI bullish divergence with price) and shot higher shortly thereafter. EUR/USD appeared comfortable above the two-minute 144/169-EMAs, while the 13-period simple moving average (SMA) remained above the EMAs, and RSI continued to find support into the key 40/45 zone. Consequently, there was no reason to divert from the intraday bullish bias.
Plus, as highlighted earlier, another factor to keep in mind is the time of day. In the forex market, most London traders tend to close their positioning between 11 a.m. and noon Eastern time, while traders in New York close between 4 p.m. and 5 p.m. Eastern time. Accordingly, price often sees a final end-of-day push, followed by profit taking (typically spotted by a bullish/bearish divergence with an oscillator) near these times of the day.
Sure enough, just after 11 a.m. Eastern time in our example, EUR/USD pushed higher once again to finally reach the intraday ATR target of 1.2927, which was then followed by a bearish divergence with RSI just ahead of noon Eastern time.
Here are some general observations regarding potential opening range scenarios per week (these are just overall findings — they should not be expected):
Two days of the week: Won’t do much (finish roughly flat)
Once a week: False break and potential reversal
One day a week: Respectable movement (50 to 70 pips from highs/lows)
One day a week: Reaches ATR target (pip amount generally equal to Average True Range using a 14-day period)
If the ATR is achieved earlier in the week, the likelihood of it occurring twice in the same week is dramatically reduced. If it does occur, it’s typically in opposing directions.
As a forex trader, when volatility begins to pick up, it’s usually a time that you want to be trading currencies, not sitting on the sidelines. As a result, if this strategy has yet to achieve the ATR target on Monday, Tuesday, or Wednesday of a particular week, it may be sensible to pay close attention to this tactic on Thursday and Friday.
Conversely, if the ATR is reached earlier in the week, it may be prudent to be on the lookout for potential market failures in the latter half of the week because they could be the marking of a false break and/or possible outright reversal.
Most important, the goal is not for you to think, “Wow, I need implement this strategy right away,” but rather to analyze the way that you approach the market on a day-to-day or week-to-week basis and think about whether you’re adequately taking into account time — because time may actually be more significant to a trader than price!
