Is a 5-minute ORB suitable for beginners?

As we all know, the first few minutes are extremely volatile for every stock. Smart money is placing their bets in the market in the first few minutes and hence it is always good to take the entry once the initial volatility subdues. During the first few minutes, the institutional orders are executed and overnight positions are adjusted. Also, in the first few minutes the price discovery happens which can create small bursts of volatility that scalpers can use effectively. One way of taking benefit of this volatility and momentum is by trading the 5-Minute Opening Range Breakout (ORB) system.

This approach focuses on identifying the initial price range and trading the breakout when price shows commitment. When applied correctly, it helps traders avoid random trades and instead participate in moves supported by early order flow.

What is the 5-Minute Opening Range?

The 5-minute opening range breakout is a very popular trading strategy. This is usually done on indices like Nifty and Sensex. The traders wait for the initial 5 minutes to get over and the first 5-minute candle range to be formed. This range can act as an important reference zone and important level to initiate the trades.

Now the trader is looking to take the entry once this range is broken. If the high of the range is broken it is bullish momentum and traders can go for buying opportunities. On the other hand, if the low of the range is broken, the trader can go for shorting opportunities

Once the entry is done the stop loss is usually the opposite side of the range. Hence, if the long entry is taken, the stoploss is the low of the first candle. If the short entry is taken, the stoploss is the high of the first candle.

The target is usually kept at 1:1 or 1:2 risk to reward.

How to Use Options to Take Entry

Since this is a Momentum strategy, option buying works pretty well in this. If the high of the candle is broken and a long trade is to be taken the trader can buy an ATM call option. On the other hand, if the candles break then the trader can buy an ATM put option. The stop loss and target is now kept based on the first candle of the options chart. The low of the first candle of the option chart is the stop loss. And the target can be two times the range of the first candle. Money management and risk management is important as usual in this strategy.

Example on Nifty

After the first 5 minutes the range was created in nifty. The high of the first candle was 23173 and low was 23029. A break out trade happened on the second candle itself on the down side. Hence a short entry was taken in the second candle. So we will look at the put option chart.

We will be using ATM put option in this example and hence 23050 PE was chosen. Here is the chart:

The buy entry in the put option chart triggered on the fourth candle at rupees 250. The stop loss is the low of the first candle which is Rs 200. Since the target is with 1:1 risk to reward, the target becomes Rs 300. The target was achieved at around 12 o'clock

Risk management is also very important. Here are the calculations that can guide traders. Assuming the trader is starting with Rs 10 Lakh capital.

Risk = 250-200 = 50 points

Risk/trade (in Rs) = 50*65 = Rs 3250

In each trade, the trader should take a max risk of 3% of the capital.

Risk allowed = 10 Lakh x 3% = Rs 3000

Hence, the trader should trade with 1 lot in this strategy.

Points to Make the Strategy Better

This opening range breakout strategy is a good strategy, but some points to be kept in mind by the traders:

There can be fake breakout as well. If the break out happens with large volume that gives more credibility.
The strike selection is very important. The trader should go for at least ATM or ITM options to get maximum profits. OTM options should be avoided because the Delta is very low.
Each trade should have the correct risk defined. The stop loss should be placed in the system. And the trader must follow the risk and money management rules
The strategy is based on Momentum and the trader should try to capture that. If after entry the momentum is dying, the trader can exit the position rather than holding it for too long.
The best part about the strategy is that there is only one or maximum two trades in a day. This reduces the external costs for the traders.
The orb strategy can be further refined by taking traits based on previous day trend or at key support and resistance levels. Traders can also look to check the higher time frame structure and combine that with the ORB to improve the decision quality.

Summary

The 5-minute Opening Range Breakout Is a very popular trading strategy in which the trader is looking to take benefit of the morning momentum. The strategy can be performed as an option buying system since the momentum is with the trader. However, as with any strategy, this strategy might have some loss making days. So to minimise that the trader should follow strict risk and money management and trade the correct strike to get the maximum benefit.

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