The Toby Crabel Opening Range Breakout (ORB) Strategy: A Deep Dive

The Essence of the Opening Range Breakout

The Opening Range Breakout (ORB) is a classic day trading strategy that seeks to capitalize on the initial directional bias of the market. Toby Crabel, in his seminal work, "Day Trading with Short Term Price Patterns and Opening Range Breakout," provided a systematic framework for trading this effective pattern. The core principle is that the high and low of a specific period after the market open, the "opening range," define a support and resistance zone. A breakout from this range signals the potential for a sustained move in that direction.

A Step-by-Step Implementation Guide

Implementing the ORB strategy requires precision and discipline. First, define the opening range period. A common choice is the first 30 or 60 minutes of the trading session. Once the opening range is established, the high and low of this period become the breakout points. A buy stop is placed just above the opening range high, and a sell stop is placed just below the opening range low. The first order triggered initiates the trade, and the other order is canceled.

The Important Role of the "Stretch"

Crabel introduced the concept of a "stretch" to filter out false breakouts. The stretch is a value added to the opening range high for a long entry and subtracted from the opening range low for a short entry. This value is typically calculated as a multiple of the market's recent "noise." Noise is defined as the minimum of (High - Open) and (Open - Low). By using a 10-day moving average of this noise, traders can create a dynamic filter that adapts to changing market volatility. A common multiple for the stretch is 2.

ORB in Action: AAPL

Imagine Apple Inc. (AAPL) opens for trading and the opening range for the first 30 minutes is between $170 and $171. The opening range high is $171, and the low is $170. Let's assume the calculated stretch is $0.25. A buy stop would be placed at $171.25, and a sell stop at $169.75. If AAPL's price rallies and hits $171.25, a long position is initiated. A stop loss could be placed at the midpoint of the opening range, $170.50, and a profit target could be set at a 2:1 or 3:1 risk/reward ratio. The trade would be exited at the end of the day if neither the stop loss nor the profit target is reached.