Initial Balance And Opening Range Breakout Strategies Explained

Initial Balance And Opening Range Breakout Strategies Explained
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The Initial Balance (IB) is a well established method for identifying key support and resistance levels for intraday traders. Trading strategies have been developed to make use of these levels as well as variations such as the opening range breakout (ORB).

The Initial Balance was originally made popular by futures traders in the pits. The price action of the first hour of the day was seen as setting the tone for the rest of the session. Over time and with digital trading many variations of this have emerged and we will discuss the key ones in this article.

Note: MT4 Traders – To find out more about the MT4 Initial Balance Indicator Set (3 variations for UK and US markets) please follow this link: Initial Balance MT4 Indicator.

What Is The Initial Balance And Opening Range?

There are several variations of the Initial Balance and we will look at four examples.

1.The Initial Balance (IB) is the market range between the high and low of the first hour of trading for the market. The high and low if that range is then drawn as horizontal lines of support and resistance for potential breakouts.

Initial Balance Example
Initial Balance Example

2. The Opening Range is often used to describe a variation of the Initial Balance and can use the first 60 minutes or lower timeframe ranges such as 30, 15 or 5 minutes.

30 Minutes Initial Balance Example
15 Minutes Initial Balance Example
15 Minutes Initial Balance Example

3. Another variation is to include the previous day’s close as either the high or the low and the first session of the new day as the other end (depending on the direction of the market). This variation is used to take account of gaps between sessions.

Previous Day's CLOSE LOW Example
Previous Day's CLOSE LOW Example
Previous Day's CLOSE HIGH Example
Previous Day's CLOSE HIGH Example

4. For Forex traders a common implementation of this is to use the high and low of the Asian market session to create a range to trade in the London Forex session. This is sometimes referred to as Trading The Open.

Asian Market Session Initial Balance Example
Asian Market Session Initial Balance Example

For more information about forex sessions you can read our article here: What Are The Forex Market Trading Session Times?

Note: In the article we will refer to all methods as Initial Balance (IB) but you can relate this to any of your preferred methods of analysis above.

The ranges for all these methods are generally used in the same way. The top and bottom of the defined range is marked as horizontal lines on the chart and are then used as levels of support and resistance.

Initial Balance and Opening Range As A Breakout Strategy

The most commonly implemented strategy associated with the Initial Balance is to use it as a breakout strategy. In this strategy the most simple implementation would be to buy on a break above the high or sell on a break below the low.

Initial Balance Breakout Strategy Example
Initial Balance Breakout Strategy Example

However, that is not a good way to implement a strategy and there are several things you should consider prior to entering any trade:

  1. What is your bias for the market (bullish or bearish)
  2. What is the market structure? Are there any other significant areas of support and resistance to be aware of
  3. How large is the IB range in relation to the average move in the market (ATR) for that time period and trading day
  4. News: are there any news events that could cause spikes in volatility in the market you are trading or cause a change in trend

Let’s consider these in more detail.

1. Market Bias

There are several ways to define market bias. The easiest method is to look at and draw in the prevailing trends on higher time frames. You can also use various sentiment indicators, net long and short indicators or relative strength (correlation) indicators.

The goal of these indicators is to get an opinion on whether we feel that the market is likely to move in an up-trend or a down-trend for that session.

What we are talking about in this step is the importance of conducting some market analysis so that you have decided on your bias for the market and whether you are looking to buy or sell.

If there is indecision and no clear bias then range trading could be a better option meaning you would not trade a breakout.

2. Market Structure

Related to the first point, the market structure is simply looking at a chart and marking out significant areas of support and resistance.

These can be via higher timeframe levels such as trend lines or trend channels, previous areas of market rejection or key round levels.

Point 1, bias, was to give you the direction of the trade. Market structure is the market analysis that will help you decide if there are any other obstacles to a successful trade.

For example, you may have a bullish (buy side) bias but see that the breakout would also be at an all time high which has recently been rejected a couple of times. This could lower the probability of a successful trade.

3. Market Average True Range (ATR)

Following the first two points you will have a bias for which way to trade a breakout and feel comfortable that there are no significant obstacles to it.

The next step is to decide whether or not the market is likely to move far enough after breaking the range for the trade to be worth it and have a decent Risk to Reward opportunity.

No one can ever tell how much a market is going to move in any one hour or day but the ATR will give you an indication of how much a market moves on average for that time period.

We will need to consider the ATR for the whole session you are intending to trade (daily if you are intraday trading) and compare it to the IB.

So for example below we took the Initial Balance for the first hour of the DJ30 market’s session which was 289 points. Comparing this to the 14 period ATR of 407 we can see that the IB is actually very large as a percentage of the ATR (71%).

This may suggest that the market has already made most of its move for the day and there may be little to gain in any breakout.

[DJI30]-ECNDaily IB and ATR
[DJI30]-ECNDaily IB and ATR

What does a large initial balance mean?

A large initial balance can mean that most of the price action has already taken place on that day. The longer the market then stays within the initial balance then the more likely it is that traders were able to complete their business within the first hour of the day.

This is another way of saying that the buyers and sellers all managed to find value within the range. This could leave little impetus for further significant moves in the day.

4. Market News

News can have a significant impact on a market. News events range in importance and some can have an effect only during the release whilst other news can change the trend entirely.

You can learn more about what moves the markets in this article from our Trading Basics series: What Factors Impact The Financial Markets?

If the news is potentially high impact then it may be worth avoiding trading at all on that day, as the news may invalidate your analysis. If it is less impactful, then a potential option is to set a no trade zone so you don’t enter on a false signal based on short term volatility caused by the news event.

Trading The Initial Balance

If you have established your bias and feel that the market structure and trade potential is sufficient to take a trade the next thing you will need is to decide how to enter the market.

How To Enter A Trade

The basic premise of the strategy is to buy on a break above the IB High or sell on a break below the IB Low.

However, price action can easily break these levels and then retreat back before the candle closes. In order not to trigger trades too early you will need to set rules on how you enter and which time frame to use for entries.

For example you could set a rule that you will use the 5 minute time frame and only enter when a 5 minute candle closes past the IB High or Low. This will prevent you entering on the candle wicks.

Other considerations:

  • The size of that candle – if that candle had a very large range compared to the previous price actions it could indicate a risky entry as there is a higher probability of a reversal. OR
  • If the candle is very large it may close well past the IB level lowering your potential reward
  • How far the candle should close past the IB level: to feel comfortable that it is a solid break and not just a blip of half a pip above
  • Trading on retracement only. Some people prefer to see a breakout and then a retracement before entering
  • End of day close – will you let the trade roll over or close at the end of the day
  • News – be careful of news announcements as these can move markets against the trend or cause fluctuations. Either avoid entries around news events or don’t trade at all on days with major events such as NFP or earnings

Trade Management (stops and targets)

These will obviously depend on your individual trading plan but the most obvious implementation is to use the half range as a stop (half the distance between the high and the low) OR to use the high or low (depending on trade) as the stop.

Half Range Stop Example
Half Range Stop Example
Full Range Stop Example
Full Range Stop Example

This will then give you the ability to set targets based on multiples of that half range or full range which you can adjust depending on your analysis in steps 1-3 above.

ATR for trade management

Many traders will use a multiple of the Average True Range (ATR) as a way of managing their trades management (stops and targets). This can be as simple as setting a multiple of the ATR of the IB range period (1 hour, 30 min, 15 min depending on what your IB is based on) for a trailing stop.

Another common approach is to take the daily ATR and add that to the low for a buy target or subtract it from the high for a sell target.

Is The Initial Balance Suitable For All Markets?

This is a good question and it is worth bearing in mind that the origin of this strategy was with the futures markets on assets that had well defined trading days.

This can be any market that is traded on a stock exchange with defined trading hours. This includes individual stocks or stock indexes such as the S&P 500 or Dow Jones but also any of the other classic futures markets such as Oil, Gold, Bonds etc.

All markets are unique and will have their own cycles and volatility. As such it is important to test multiple variations of the IB strategy on a market to find the best fit.

For example, we found that trading the Dow our best results were when targeting a target risk to reward of 1 to 1. However, when trading DAX a 1 to 2 risk to reward profile worked better over time.

Forex Opening Range Breakout (ORB) Strategy

As the Forex market is 24 hours, it does not have an open time to base the range on. As such we need to base the opening times on the convention of the Forex Trading Sessions.

They are generally categorised as the Asian session, European Session and North American session. Often people just refer to the Europe session as the London session and the North American session as the New York Session.

For more information about forex sessions you can read our article here: What Are The Forex Market Trading Session Times?

Session GMT Open GMT Close
Sydney (Asian) 21:00 PM 05:00 AM
Tokyo (Asian) 23:00 AM 07:00 AM
Frankfurt (European) 07:00 AM 15:00 PM
London (European) 08:00 AM 16:00 PM
New York (North American) 13:00 PM 21:00 PM

Applying the Opening Range to Forex

The London session is the most popular session for forex trading as the most volume happens then. Using the GMT customs above we could set the opening range at any time from 07:00 GMT.

As the start time could be misinterpreted (is it Frankfurt open or London open?) a more common approach to trading the range for Forex is to use the range of the previous session, in particular the Asian session being used to set the range for the London session.

Traders can then use the high and low of the Asian session to set breakout areas to trade. All the same considerations in terms of market bias, structure, volatility and news will still apply before making a trade.

In the Forex implementation adding/subtracting the daily ATR to the low/high is a very common way of target setting a breakout rather than just setting multiples of the range or half range.

Initial Balance Indicators MT4

Nothard Trading has produced a set of 3 initial balance indicators for MT4 which are available from our Pro Indicator selection.

To review please follow this link: Initial Balance MT4 Indicator.

Justina Nothard

Justina Nothard

Hi, I’m Justina Nothard, a retail investor trading Stock Index Futures.

I understand how hard it can be for the ordinary trader to learn the basics and find useful tools and practical information.

This is why I decided to create Nothard Trading to help you take control of your trading.

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