Advanced trading strategies
Open range breakout trade
Opening range breakouts are one of the most common trading strategies. Let’s take a look at a useful way of trading with breakouts: the European opening range strategy.
Generally, breakouts are used when the market is already near the extreme high or low of the recent past. When the market is trending and moving strongly in one direction, breakout trading ensures that you never miss the move.
While the forex market is open 24 hours a day (Sunday evening through Friday evening ET), market activity in a given pair is not necessarily consistent throughout. The Australian, Tokyo, London, and New York sessions see heightened trading each with their respective currencies: AUD, JPY, EUR/GBP, and USD. The European opening range strategy typically focuses on EUR/USD, although you can apply it to any European major, such as GBP/USD or USD/CHF. It utilizes the fact that early market activity on a given day may set the tone for the remaining sessions.
Trading the European Opening Range
To trade the European Opening Range strategy, you follow these three steps:
1. Find the European range for the current day
To do this, you’ll need to identify your market’s high and low during the half-hour before the London open (7:30-8:00am GMT).
2. Look for a breakout from this range,+/- 10 pips
You’ll want the market to stay above or below this level for 10-15 minutes. This tells you the momentum direction for the remainder of the day’s sessions – so you can open your position accordingly.
Instead of using +/- 10 pips, you could look for a breakout +/- 1/10th of the market’s daily average true range (ATR).
3. Manage this bullish or bearish sentiment
Now that you know the most likely trend direction of the market for the rest of the day, you can trade it. We’d recommend using lower timeframes (two or five minutes), plus a combination of moving averages and oscillator indicators to watch for smaller countertrends.
Factors to watch out for
Major news announcements can send any strategy awry, and this case is no different. Make sure to pay attention to the FOREX.com economic calendar, and consider exiting your position if a medium or high-impact announcement is on the way.
The time of day can also affect this strategy, particularly surrounding the following events:
- Major option expiries
- Currency fixings
- Currency futures closes
If price is struggling near these events (typically spotted by a bullish/bearish divergence with an oscillator), then it might be prudent to reduce your position’s size ahead of time. This type of approach may help to minimize the emotional aspect to trading, since there’s an identifiable area to know where you’re wrong (the opposite side of the breakout’s high/low).
2. Average True Range (ATR)
As a currency trader, when volatility begins to pick up you usually want to be trading, not sitting on the sidelines.
As a result, if a market has yet to hit its Average True Range on Monday, Tuesday or Wednesday of a particular week, then 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 failures in the latter half of the week, as they could be the marking of a false break – or possible outright reversal.